AI Demand And Cloud Migration Will Drive Powerful Long Term Upside

Catalysts

About FactSet Research Systems

FactSet Research Systems provides integrated financial data, analytics and technology solutions that power critical workflows for global financial institutions.

What are the underlying business or industry changes driving this perspective?

• Scaling demand for AI enhanced financial intelligence and workflow automation, where FactSet's open architecture, cloud native platform and curated historical data set position it to capture a larger share of client technology budgets, supporting sustained revenue growth and higher renewal driven earnings.
• Accelerating modernization of client tech stacks and migration to the cloud, which encourages vendor consolidation toward integrated, API first platforms like FactSet, driving larger enterprise wide contracts, higher ASV per client and improved operating leverage in net margins.
• Structural growth in wealth management and adviser sophistication, combined with ongoing competitive displacements of legacy providers, supports double digit wealth ASV growth, rising off platform data adoption and expanding contribution to total revenue and EPS.
• Rising complexity across the portfolio life cycle and middle office, including demand for integrated OMS, IBOR and risk analytics, makes managed services and portfolio life cycle solutions increasingly attractive, expanding high quality recurring data and analytics revenues and supporting margin resilience.
• Global expansion of data intensive strategies across asset managers, hedge funds, banks and partners, alongside FactSet's continued build out of real time, benchmark, deep sector and AI ready content, increases attach rates and pricing power, underpinning multi year revenue compounding and EPS growth.

Assumptions

This narrative explores a more optimistic perspective on FactSet Research Systems compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming FactSet Research Systems's revenue will grow by 6.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 25.7% today to 26.1% in 3 years time.
• The bullish analysts expect earnings to reach $726.5 million (and earnings per share of $20.21) by about December 2028, up from $597.0 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 bullish analyst cohort, the company would need to trade at a PE ratio of 27.1x on those 2028 earnings, up from 18.3x today. This future PE is greater than the current PE for the US Capital Markets industry at 25.9x.
• The bullish analysts expect the number of shares outstanding to decline by 1.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The multiyear AI investment cycle may not deliver a sufficient revenue uplift if client adoption remains slow due to longer sales cycles, tighter tech budgets and complex compliance requirements in highly regulated institutions, which would leave FactSet with structurally higher technology and content costs and put pressure on adjusted operating margins and earnings growth over time.
• Intensifying AI competition from both incumbent data vendors and new specialist start ups could erode FactSet's differentiation in AI enhanced workflows and data platforms, forcing greater pricing concessions or higher sales and R&D spend to defend share, which would weigh on revenue growth rates and limit operating leverage in net margins.
• Ongoing secular headwinds for certain client segments such as midsized EMEA asset managers and asset owners, combined with continued pricing pressure in parts of Asia Pacific, could constrain ASV expansion and renewals outside of the faster growing wealth channel, leading to slower consolidated top line growth and lower incremental earnings than the bullish narrative assumes.
• Large scale modernization of client tech stacks and cloud migration may encourage some firms to build or favor alternative internal and third party solutions such as OMS, IBOR and data hubs rather than deepen dependence on FactSet. This would cap vendor consolidation benefits and reduce the ability to expand enterprise wide contracts, dampening revenue growth and future margin expansion.
• Rising structural expenses tied to cybersecurity, AI ready data infrastructure and cloud usage, alongside higher people related costs and acquisition dilution, may offset expected productivity gains. This could prevent FactSet from returning to previously targeted margin levels and result in flatter net margin and earnings trajectories than the optimistic scenario for share price appreciation requires.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for FactSet Research Systems is $430.0, which represents up to two standard deviations above the consensus price target of $333.69. This valuation is based on what can be assumed as the expectations of FactSet Research Systems's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $430.0, and the most bearish reporting a price target of just $260.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $726.5 million, and it would be trading on a PE ratio of 27.1x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $291.55, the analyst price target of $430.0 is 32.2% 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.