AI Integration And Cloud Platforms Will Unlock In Silico Opportunities

Key Takeaways

• Advanced AI integration and a unified operating model are set to boost innovation, accelerate software adoption, and drive sustained operational efficiencies.
  
• Expansion into new clinical trial and R&D verticals positions the company to capture larger, recurring revenue streams and long-term margin expansion globally.
  
• Weak demand, client concentration, industry shifts, and competition from AI and open-source tools undermine revenue stability, margins, and the effectiveness of recent acquisitions.

Catalysts

Develops drug discovery and development software for modeling and simulation, and prediction of molecular properties utilizing artificial intelligence and machine learning based technology worldwide.

• While analyst consensus expects only modest improvement from recent backlog gains and continued AI upgrades, the scale and velocity of Simulations Plus' AI integration-including portfolio-wide embedded AI copilot tools and the new cloud platform-positions the company to unlock high-double-digit software revenue growth, as these proprietary and productivity-boosting features could set a new industry standard and accelerate both adoption and cross-sell rates.
  
• Analysts broadly agree that Pro-ficiency and Medical Communications will deliver incremental gains as macro pressures ease, but consensus materially understates the strategic impact of Simulations Plus' extension into clinical trial operations and the Nurocor investment, which together could open entirely new multi-billion-dollar verticals, driving margin-rich SaaS revenues and a structural upward reset in adjusted EBITDA well beyond current guidance.
  
• As regulatory and industry momentum rapidly shifts toward in silico drug development and the FDA moves to restrict animal testing, Simulations Plus is poised to move from being a useful tool to an essential technology partner in pharmaceutical R&D, resulting in dramatically increased pricing power, a stickier customer base, and long-term net margin expansion as software renewals become mission-critical.
  
• The company's streamlined, unified operating model and centralized R&D is set to boost both the pace and efficiency of innovation, enabling rapid product cycles and lower overall OpEx per unit of revenue, thereby supporting aggressive scaling and sustained improvement in company-wide operating leverage and free cash flow.
  
• Despite current headwinds, the rising tide of global pharmaceutical R&D spending, expanding SaaS penetration into Asia-Pacific and Latin America, as well as growing demand for advanced personalized medicine simulations, positions Simulations Plus for multi-year, above-market revenue growth and international margin expansion as new geographies and verticals unlock high-growth, recurring revenue streams.

Simulations Plus Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Simulations Plus compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Simulations Plus's revenue will grow by 7.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -78.6% today to 25.8% in 3 years time.
• The bullish analysts expect earnings to reach $25.7 million (and earnings per share of $1.36) by about July 2028, up from $-63.2 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 29.8x on those 2028 earnings, up from -4.2x today. This future PE is lower than the current PE for the US Healthcare Services industry at 59.7x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

Simulations Plus Future Earnings Per Share Growth

Risks

• Prolonged economic uncertainty and continued pullback in biopharma R&D spending could extend weak demand for Simulations Plus's software and services, leading to slower revenue growth and pressure on operating margins in the long term.
  
• Pharmaceutical industry consolidation and site closures are already resulting in lower renewal rates for key products, such as GastroPlus, causing volatility in recurring revenues and introducing downside risk to overall revenue stability.
  
• Heavy dependence on large pharmaceutical clients means that contract cancellations, particularly when linked to negative clinical trial results, can cause sudden and material hits to revenue and earnings, as evidenced by a single client cancellation that impacted near-term revenues by approximately $2 million.
  
• The increasing breadth and accessibility of AI and open-source modeling tools may erode Simulations Plus's pricing power and competitive edge over time, threatening long-term net margins as the market for specialized biosimulation software becomes more commoditized.
  
• Integration challenges and underperformance in acquired businesses, such as Pro-ficiency and Medical Communications, have resulted in significant non-cash impairment charges and lower-than-expected revenue contributions, indicating ongoing risks around acquisition strategy, potential cost overruns, and future margin erosion.

Valuation

• The assumed bullish price target for Simulations Plus is $31.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Simulations Plus'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 $31.0, and the most bearish reporting a price target of just $20.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $99.8 million, earnings will come to $25.7 million, and it would be trading on a PE ratio of 29.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $13.04, the bullish analyst price target of $31.0 is 57.9% 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.