Expansion Into High-Margin Areas And AI Will Improve Future Outlook

Key Takeaways

• Dayforce's focus on higher-margin areas and product innovation, such as the Dayforce Wallet, aims to boost margins and revenue growth.
  
• Strategic partnerships and ongoing share repurchases are expected to improve service delivery efficiency and enhance earnings per share.
  
• Currency fluctuations, unpredictable revenue streams, and reliance on innovation pose risks to Dayforce's revenue predictability, growth metrics, and market competitiveness.

Catalysts

Operates as a human capital management (HCM) software company in the United States, Canada, Australia, and internationally.

• Dayforce is seeing strong sales growth, with the fourth quarter and January sales both showing significant increases, suggesting a positive revenue trajectory for 2025 and beyond.
  
• The company is focused on expanding its higher-margin areas and phasing out legacy segments, aiming to increase adjusted EBITDA margins to 32% in 2025 and improve free cash flow margins to above 20% in the mid-term, which should positively impact earnings.
  
• Dayforce is capitalizing on product innovation such as the Dayforce Wallet and AI-driven capabilities, expected to contribute to add-on sales and higher recurring revenue per customer, enhancing net margins and revenue growth.
  
• Strategic partnerships and systems integrators are enhancing service delivery efficiency, which is expected to drive professional services revenue to breakeven, improving overall profit margins.
  
• The company plans to continue share repurchases, which could enhance earnings per share by offsetting dilution from stock-based compensation and signaling confidence in its financial performance.

Dayforce Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dayforce's revenue will grow by 11.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $315.1 million (and earnings per share of $2.05) by about April 2028, up from $18.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $369.1 million in earnings, and the most bearish expecting $224 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.4x on those 2028 earnings, down from 501.5x today. This future PE is greater than the current PE for the US Professional Services industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.64%, as per the Simply Wall St company report.

Dayforce Future Earnings Per Share Growth

Risks

• Potential headwinds from currency fluctuations, especially related to the U.S., Canadian, and Australian dollars, could adversely affect Dayforce's reported revenue and profits, making earnings projections less predictable.
  
• Muted seasonality impacts and unpredictable fee-based revenues like print and tax filing fees highlight variability and uncertainty in certain revenue streams, potentially causing forecast misses in recurring revenue segments.
  
• Contract re-negotiations resulting in shifts of revenue allocation from recurring to professional services could reduce predictability in revenue composition and affect net margins.
  
• Employee volume growth came in below expectations due to muted seasonal effects and adverse weather conditions, suggesting possible volatility in growth metrics tied to employee count, which could impact revenue targets.
  
• Given the competitive landscape, reliance on continuous innovation and product differentiation to sustain pricing power and market share gains remains a risk; this could impact revenue and margins if execution falters.

Valuation

• The analysts have a consensus price target of $71.71 for Dayforce based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $95.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $315.1 million, and it would be trading on a PE ratio of 44.4x, assuming you use a discount rate of 6.6%.
• Given the current share price of $57.35, the analyst price target of $71.71 is 20.0% 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.