Generative AI Fuels Operational Gains And Sharpens Competitive Edge Amid Financial Optimism

Key Takeaways

• Introduction of generative AI and aggressive technology investments are poised to bolster business attraction and reinforce customer loyalty, enhancing revenue.
  
• Strategic divestiture and contract modernization underscore a focused growth and efficiency strategy, likely improving revenue growth rates and net margins.
  
• Dependence on irregular revenue sources and the underperforming EVERFI segment pose significant risks to future earnings, cash flow, and overall growth stability.

Catalysts

Provides cloud software solutions to nonprofits, foundations, education institutions, and healthcare organizations in the United States and internationally.

• Product innovation and aggressive investment in technology, particularly the introduction of generative AI capabilities, aimed at enhancing operational efficiency for customers, are likely to attract new business and strengthen existing customer relationships, impacting revenue growth positively.
  
• The expansion of the stock repurchase program to $800 million demonstrates a strong commitment to returning value to shareholders, which could enhance earnings per share (EPS) and reflect positively on net income.
  
• The execution of a modernized approach to contract renewals, moving customers to standard 3-year contracts with annual price escalators, aims to generate sustained revenue growth, positively affecting both revenue and margins.
  
• The strategic considerations for divesting EVERFI indicate a focused approach to optimizing the portfolio, potentially eliminating a drag on growth and improving both total revenue growth rates and net margins.
  
• The robust free cash flow generation, up approximately 50% compared to the first half of 2023, provides ample flexibility for further investments in innovation and shareholder returns, likely to impact the overall financial stability and growth prospects of the company.

Assumptions

• Analysts are assuming Blackbaud's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 9.3% in 3 years time.
• Analysts expect earnings to reach $128.7 million (and earnings per share of $2.5) by about October 2027, up from $41.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $148.7 million in earnings, and the most bearish expecting $105.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 42.3x on those 2027 earnings, down from 103.8x today. This future PE is greater than the current PE for the US Software industry at 38.5x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Risks

• The ongoing underperformance of EVERFI, representing 8% of the company's total revenue, is a drag on growth that could negatively impact future earnings and overall revenue growth.
  
• Dependence on viral charitable giving events for revenue spikes presents an unpredictable revenue stream, potentially affecting net margins and making revenue forecasting challenging.
  
• Efforts to divest non-core business segments like EVERFI could lead to short-term distractions and financial impacts, potentially affecting cash flow and operational focus.
  
• The transition to new contract renewal processes, including moving customers to standard 3-year contracts with annual price escalators, might result in implementation challenges or customer pushback, potentially affecting recurring revenue growth.
  
• EVERFI's dilutive effect on growth and adjusted EBITDA margins, alongside the possible need for strategic alternatives or divestiture, could lead to uncertain financial outcomes and impact the company's ability to improve shareholder value efficiently.

Valuation

• The analysts have a consensus price target of $86.62 for Blackbaud 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 $95.0, and the most bearish reporting a price target of just $77.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $128.7 million, and it would be trading on a PE ratio of 42.3x, assuming you use a discount rate of 7.2%.
• Given the current share price of $85.22, the analyst's price target of $86.62 is 1.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.