Workday Partnership And Bundled HR Will Unlock Mid-Market Potential

Key Takeaways

• Launching HRScale with Workday and expanding AI-driven HR offerings positions Insperity for higher revenue growth and scalable margin improvements in the mid-market segment.
  
• Rising HR compliance complexity and increased SMB formation boost ongoing demand for bundled services, supporting long-term client growth and sustainable recurring revenue.
  
• Persistent healthcare cost inflation, SMB exposure, execution risk in tech partnerships, rising competition, and insurance concentration pose sustained threats to margins, revenue growth, and client retention.

Catalysts

Engages in the provision of human resources (HR) and business solutions to improve business performance for small and medium-sized businesses primarily in the United States.

• The upcoming launch of Insperity HRScale, a joint solution with Workday, targets a broader and more lucrative mid-market segment, leveraging both advanced HR technology and comprehensive services; this is expected to drive higher revenue growth and improved operating leverage as premium pricing and larger average client size become possible.
  
• Increasing pricing on new and renewing business, alongside benefit plan design changes and contract renegotiation with UHC to address elevated benefits cost trends, should gradually restore and enhance gross profit margins and earnings, particularly from 2026 onward.
  
• Secular increases in the complexity of employment regulation and compliance for SMBs continue to expand demand for bundled HR, payroll, and risk management solutions, supporting net client additions and recurring revenue growth as small businesses increasingly look to outsource HR functions.
  
• Expansion and enhancement of Insperity's technology platforms-including deeper AI integration and SaaS-based HR offerings-are driving higher sales efficiency and improving productivity, setting the stage for scalable margin expansion and stronger EBITDA over the next several years.
  
• Growth in SMB formation and post-pandemic entrepreneurship, combined with demographic trends emphasizing employee benefits and retention, expands Insperity's addressable market and supports sustainable long-term revenue and earnings growth as these businesses seek value-added HR services.

Insperity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Insperity's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 1.4% in 3 years time.
• Analysts expect earnings to reach $109.6 million (and earnings per share of $2.56) by about August 2028, up from $40.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.8x on those 2028 earnings, down from 47.6x today. This future PE is greater than the current PE for the US Professional Services industry at 22.5x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

Insperity Future Earnings Per Share Growth

Risks

• Persistent and higher-than-expected increases in employee benefits and healthcare costs-particularly specialty drug utilization and large medical claims-are pressuring gross profit per worksite employee and EBITDA, creating risk that cost escalation could outpace the company's pricing and plan design adjustments, thus compressing net margins and earnings.
  
• Heavy reliance on smaller and mid-sized business clients (SMBs) exposes Insperity to cyclical vulnerabilities, with management repeatedly noting net client hiring remains well below historical norms and macroeconomic conditions for SMBs remain tentative, which could limit revenue growth and increase earnings volatility in economic downturns.
  
• The multi-year, high-cost investment in the Workday strategic partnership (potentially exceeding $150 million over five years) is accompanied by execution risk, potential further delays in scalable launch, and uncertainty regarding the timing and financial magnitude of returns-posing risk of ongoing elevated expenses without commensurate near-term revenue or margin uplift.
  
• Heightened competition in the HR outsourcing and PEO space-including downward pricing pressure and client migration toward more automated, self-service solutions-could erode Insperity's pricing power, pressure average revenue per client, and limit margin expansion efforts, particularly as mid-sized and larger clients increasingly seek cloud-based HR alternatives.
  
• Dependence on UnitedHealthcare as its primary insurance partner introduces concentration risk and limited leverage in cost containment, contract negotiations, and plan design; any inability to realign incentives or mitigate future healthcare cost inflation could further weigh on operating margins or necessitate uncompetitive price increases, impacting client retention and top-line revenue.

Valuation

• The analysts have a consensus price target of $57.75 for Insperity 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 $74.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.7 billion, earnings will come to $109.6 million, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $50.5, the analyst price target of $57.75 is 12.6% 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.