Tactical Acquisitions And Software Innovation Drive Growth Amid Market Challenges

Key Takeaways

• Strategic acquisitions, including the Pro-ficiency deal, could boost market reach and solidify leadership, enhancing future revenue growth.
  
• Enhanced software and integration efficiencies are expected to improve competitiveness, cost savings, and net margins.
  
• Challenges in synergy realization, market performance, and contract delays could affect revenue growth, profitability, and financial targets.

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.

• Simulations Plus expects the recent acquisition of Pro-ficiency to significantly enhance their market opportunity by doubling their total addressable market (TAM) to $8 billion, potentially driving future top-line revenue growth.
  
• The continuation of strategic acquisitions to supplement organic growth could provide a catalyst for earnings expansion and solidify market leadership.
  
• Updates to core software products, such as the advanced models in GastroPlus and ADMET Predictor, are expected to enhance competitiveness and customer retention, positively impacting future revenue.
  
• Improved efficiency from integrating Pro-ficiency, including back-office financial operations integration, is expected to lead to cost savings and margin improvement, enhancing net margins.
  
• The company expects to capitalize on possible increased client spending in 2025, driven by an improved macro environment, which could bolster both revenue and earnings per share.

Simulations Plus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Simulations Plus's revenue will grow by 19.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.2% today to 20.4% in 3 years time.
• Analysts expect earnings to reach $24.4 million (and earnings per share of $1.14) by about November 2027, up from $10.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 54.9x on those 2027 earnings, down from 64.2x today. This future PE is lower than the current PE for the US Healthcare Services industry at 56.7x.
• Analysts expect the number of shares outstanding to grow by 2.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.57%, as per the Simply Wall St company report.

Simulations Plus Future Earnings Per Share Growth

Risks

• Pro-ficiency's fourth-quarter contribution came in lower than expected, which might suggest challenges in realizing synergies and capturing revenue, potentially impacting overall revenue growth and profitability.
  
• The Asian markets have been lagging in performance compared to North America and Europe, which could lead to uneven geographic revenue streams and put downward pressure on total revenue.
  
• The company's 10% to 15% organic growth guidance is based on cautious assumptions about the biotech market conditions, implying potential vulnerability to sustained low levels of client spending and affecting revenue projections.
  
• There have been fluctuations and delays in service contracts and software renewals, particularly with lumpiness in QSP software, which could impact expected revenue and disrupt cash flows.
  
• Adjustments to backlog due to delayed contracts create uncertainty in revenue timing and recognition, presenting a risk to achieving anticipated earnings and financial targets.

Valuation

• The analysts have a consensus price target of $52.75 for Simulations Plus 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 $65.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $119.6 million, earnings will come to $24.4 million, and it would be trading on a PE ratio of 54.9x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $31.83, the analyst's price target of $52.75 is 39.7% 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.