Generative AI And Rising Costs Will Erode Revenue Viability

Key Takeaways

• Rapid adoption of AI and automation, along with industry commoditization, threatens both core revenues and long-term market share.
  
• High client concentration, ongoing cost pressures, and increased regulatory demands expose the company to volatile earnings and margin compression.
  
• Diversification, AI-driven solutions, and ongoing innovation are supporting sustainable revenue growth, margin expansion, and reduced reliance on any single sector.

Catalysts

Offers digital customer experience and digital solutions in the Asia-Pacific, the Central America, Europe, Africa, North America, the United Arab Emirates, and internationally.

• The accelerating adoption of generative AI and automation by enterprise clients is expected to significantly reduce the need for traditional, human-based outsourced services, eroding core revenue streams and stalling organic revenue growth for TELUS International in the coming years.
  
• Persistent labor inflation in key geographies, compounded by an intensely price-competitive environment and clients' continual demand for efficiency improvements, is likely to keep net margins structurally compressed, with little ability for the company to pass on increased costs.
  
• Ongoing revenue concentration risks, with 26% of sales still tied to the parent TELUS and substantial exposure to a handful of large tech clients, leave the company highly vulnerable to contract renegotiations, customer budget tightening, and increasing revenue volatility, threatening both revenue stability and future earnings.
  
• Heightened global focus on data privacy, regulatory compliance, and data sovereignty could further restrict international operations and elevate compliance and operational costs, materially undermining future profitability and increasing the risk of growth slowdowns, especially for cross-border digital services.
  
• Structural industry changes, including the commoditization of BPO services and a growing customer preference for fully integrated digital transformation providers, are expected to squeeze bill rates and erode addressable market share for TELUS International, limiting its ability to grow revenues and earnings over the long term.

TELUS International (Cda) Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on TELUS International (Cda) compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming TELUS International (Cda)'s revenue will grow by 1.9% annually over the next 3 years.
• The bearish analysts are not forecasting that TELUS International (Cda) will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate TELUS International (Cda)'s profit margin will increase from -14.1% to the average US Professional Services industry of 7.2% in 3 years.
• If TELUS International (Cda)'s profit margin were to converge on the industry average, you could expect earnings to reach $206.7 million (and earnings per share of $0.72) by about August 2028, up from $-383.0 million 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 6.1x on those 2028 earnings, up from -2.8x today. This future PE is lower than the current PE for the US Professional Services industry at 25.4x.
• Analysts expect the number of shares outstanding to grow by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.01%, as per the Simply Wall St company report.

TELUS International (Cda) Future Earnings Per Share Growth

Risks

• The company is successfully diversifying its client base across multiple high-growth sectors such as healthcare, automotive, financial services, entertainment, gaming, and communications, which is likely to support long-term revenue stability and reduce over-reliance on any single vertical.
  
• TELUS International is demonstrating strong momentum in AI & Data Solutions and Digital Solutions, with accelerating demand and growing recognition as a partner of choice for advanced, high-complexity projects, positioning the company well to benefit from secular growth in digital transformation and enterprise AI adoption and supporting earnings growth.
  
• The company is leveraging AI both internally and as part of its offerings, driving operational efficiencies, workforce management improvements, and enhanced client performance, which could mitigate margin pressure and boost profitability over the long term.
  
• Ongoing investments in proprietary platforms, new technology (such as the Fuel iX suite), and premium talent are enabling TELUS International to upsell existing clients, expand the scope and value of contracts, and increase revenue per client, supporting sustainable revenue and margin expansion.
  
• The normalization of discretionary spending and digital transformation budgets among enterprise clients, combined with a robust pipeline of new and expanding contracts across multiple geographies, indicates continued top-line growth potential that may bolster both revenue and free cash flow.

Valuation

• The assumed bearish price target for TELUS International (Cda) is $3.4, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of TELUS International (Cda)'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 $5.25, and the most bearish reporting a price target of just $3.4.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $206.7 million, and it would be trading on a PE ratio of 6.1x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $3.79, the bearish analyst price target of $3.4 is 11.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.