Delayed Deals And Risks Will Test Transformation Yet Uncover Opportunity

Key Takeaways

• Delayed deal closures and slow project pipeline hamper near-term revenue growth, despite strong demand for digital transformation and outsourcing services.
  
• Execution challenges and increased competition threaten the company's ability to fully benefit from long-term secular trends and strategic partnerships.
  
• Prolonged deal cycles, weak non-recurring revenue, stagnant participant volumes, sales execution risks, and a large goodwill impairment threaten future growth and profitability.

Catalysts

A technology-enabled services company worldwide.

• While Alight continues to benefit from global trends toward digital transformation and cloud-based enterprise solutions-with ongoing investment in AI, automation, and platform enhancements expected to support higher long-term margins and revenue per client-the near-term slowdowns in deal closures and elongated sales cycles risk delaying the realization of these secular growth opportunities, potentially impacting recognized revenue and earnings growth in upcoming quarters.
  
• Although rising regulatory complexity and employer demand for outsourced benefits administration are likely to increase customer stickiness and drive higher-value, multi-year contracts, Alight faces the headwind of flat participant counts and a project revenue pipeline that shows little sign of recovery, limiting near-term top-line growth in its core markets and challenging its ability to fully capitalize on secular outsourcing momentum.
  
• While significant partnerships-such as the recent collaboration with Goldman Sachs Asset Management-are poised to open new differentiated and potentially recurring revenue streams in wealth and retirement services, these contributions are expected only in the out-years, and the immediate impact is muted by execution challenges and delayed client expansion, tempering short-term revenue expectations and cash flow uplift.
  
• Despite sustained investment in technology and operational improvements to drive automation and profitability, the company's dependence on successful commercial execution-including upgrades to the sales organization and hiring for specialty expertise-creates execution risk; any continued delays in securing new business or upsell deals could restrict growth in annual recurring revenue and suppress operating leverage.
  
• While the broader industry trend toward strategic multi-year outsourcing of HR and payroll functions supports higher revenue visibility and retention, intensifying competition, the potential for increased commoditization of services, and slow client decision-making cycles may compress margins and undermine Alight's ability to convert pipeline opportunities into earnings growth over the medium term.

Alight Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alight compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alight's revenue will grow by 2.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -47.8% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach $86.7 million (and earnings per share of $0.16) by about September 2028, up from $-1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 46.3x on those 2028 earnings, up from -1.9x today. This future PE is greater than the current PE for the US Professional Services industry at 26.4x.
• Analysts expect the number of shares outstanding to decline by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.88%, as per the Simply Wall St company report.

Alight Future Earnings Per Share Growth

Risks

• Prolonged deal cycles and delayed client decision-making have led to a downward revision of annual recurring revenue bookings from expectations of double-digit growth to a forecast of flat or slightly down, signaling a risk to future top-line revenue growth if this trend persists.
  
• Flat participant volumes, with no growth seen in the current period, challenge the expansion of recurring revenue streams and suggest potential limits to organic revenue growth if workforce trends or outsourcing demand stagnate.
  
• Continuing declines in non-recurring project revenues, which were down 20% in the quarter and are expected to remain weak, could constrain overall top-line growth and reduce opportunities to enhance gross profit and EBITDA through higher-margin, one-time services.
  
• Execution risks related to commercial performance-including an acknowledged need for deeper domain expertise within the sales team and leadership turnover-could undermine the company's ability to win new business or upsell existing clients, ultimately impacting both revenue and net margins.
  
• A $983 million non-cash goodwill impairment charge, justified by lower market valuations compared to Alight's public debut and ongoing unfavorable macro and industry conditions, raises concerns about the company's long-term earnings power and asset quality, potentially casting doubt on future returns for shareholders.

Valuation

• The assumed bearish price target for Alight is $6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Alight's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $86.7 million, and it would be trading on a PE ratio of 46.3x, assuming you use a discount rate of 8.9%.
• Given the current share price of $3.92, the bearish analyst price target of $6.0 is 34.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.