Rising Cybersecurity Costs And Fierce SaaS Competition Will Erode Margins

Key Takeaways

• Mounting cybersecurity, compliance, and competitive pressures are likely to squeeze Agilysys' margins and diminish future profitability.
  
• Shifting customer budgets, automation trends, and industry consolidation threaten Agilysys' organic growth and long-term revenue potential.
  
• Strong adoption of cloud-based solutions, expanded international presence, and a growing SaaS ecosystem position Agilysys for sustained revenue growth and margin improvement.

Catalysts

Operates as a developer and marketer of software-enabled solutions and services to the hospitality industry in North America, Europe, the Asia-Pacific, and India.

• The intensifying threat environment in the hospitality sector will require Agilysys to substantially increase investments in cybersecurity and compliance. As these costs accelerate faster than topline growth, resulting operating margins and profitability are likely to face persistent downward pressure in coming years.
  
• The risk of a global economic slowdown-driven by rising interest rates, demographic shifts, or inflation-may lead to reduced customer budgets for IT and software, dampening both subscription and services revenue growth and threatening the company's sustained organic expansion rates.
  
• Growing competition from larger SaaS providers and new entrants with more scalable or AI-driven hospitality solutions will likely force Agilysys to lower prices or accept higher customer churn, creating headwinds for future net revenue and compressing gross margins over time.
  
• The increasing adoption of automation and self-service by hospitality operators raises the possibility that hotels and venues will bypass traditional third-party software platforms like Agilysys, shrinking the company's total addressable market and leading to stagnant or declining revenues.
  
• Consolidation among hospitality technology vendors is poised to favor larger, well-capitalized competitors-potentially leaving niche players like Agilysys unable to match R&D investment, innovation pace, or pricing, which could accelerate customer losses and erode future earnings quality.

Agilysys Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Agilysys compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Agilysys's revenue will grow by 14.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 8.4% today to 7.9% in 3 years time.
• The bearish analysts expect earnings to reach $32.7 million (and earnings per share of $1.13) by about July 2028, up from $23.2 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 bearish analyst cohort, the company would need to trade at a PE ratio of 96.8x on those 2028 earnings, down from 139.9x today. This future PE is greater than the current PE for the US Software industry at 43.1x.
• Analysts expect the number of shares outstanding to grow by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.92%, as per the Simply Wall St company report.

Agilysys Future Earnings Per Share Growth

Risks

• The accelerating digital transformation in hospitality is driving robust demand for cloud-based enterprise solutions, and Agilysys is benefiting from this trend as shown by its record subscription revenue growth of nearly 40% during fiscal 2025 and a guided 25% growth for fiscal 2026, indicating a sustained expansion in recurring revenue and improved margin visibility.
  
• The company's modern, unified POS platform and comprehensive product ecosystem are being widely adopted, establishing high switching costs and customer stickiness, which supports ongoing increases in average revenue per customer and strengthens both net revenue and customer retention over time.
  
• Agilysys is deepening its vertical integration through the development of proprietary add-on modules and cross-product functionality, with add-on sales achieving record highs and driving higher gross margins, suggesting long-term differentiation and the potential for further margin expansion.
  
• International growth is gaining momentum, as the company expands its reach in global hospitality markets and leverages recent acquisitions like Book4time to broaden its enterprise client base and tap into significant white space, which can meaningfully boost overall revenues in future years.
  
• The company's expanding SaaS revenue base and record sales and services backlogs, combined with disciplined investment in R&D, product innovation, and cybersecurity, provide a solid foundation for sustained multi-year growth in both top-line revenue and profitability.

Valuation

• The assumed bearish price target for Agilysys is $90.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Agilysys'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 $152.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $415.4 million, earnings will come to $32.7 million, and it would be trading on a PE ratio of 96.8x, assuming you use a discount rate of 7.9%.
• Given the current share price of $116.91, the bearish analyst price target of $90.0 is 29.9% 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.