Fiscal Constraints And Open-Source Competition Will Erode Margins

Key Takeaways

• Reductions in global infrastructure spending and increased competition from open-source and established rivals threaten Bentley's growth, pricing power, and long-term customer retention.
  
• Rising compliance, cybersecurity costs, and demands for AI-driven, cloud-native solutions could erode margins, require significant reinvestment, and put legacy products at risk.
  
• Infrastructure investment, recurring revenue, advanced tech adoption, and geographic diversification drive predictable growth, resilience, and margin expansion while reducing regional and market risks.

Catalysts

Provides infrastructure engineering software solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific.

• Slowing or reversal of global infrastructure spending due to increasing sovereign debt burdens, fiscal constraints, and shifting government priorities could sharply reduce demand for Bentley's infrastructure software, leading to disappointing revenue growth and lower earnings as large public funding programs wind down or become unpredictable.
  
• The ongoing acceleration and adoption of open-source standards and platforms in engineering and infrastructure sectors threaten to undermine Bentley's historical pricing power, potentially forcing down software prices, eroding margins, and making future recurring revenue less sticky as customers opt for less costly, more interoperable alternatives.
  
• Intensifying competition from Autodesk, Dassault Systèmes, and agile, cloud-native startups could force Bentley into higher research and development and sales and marketing expenses to defend its market share, leading to net margin compression and potentially diminishing the bottom-line benefit of its transition to subscription models.
  
• Dramatic increases in compliance costs related to data privacy and cybersecurity regulation expose Bentley to escalating operating expenses and the risk of reputational damage should breaches occur, thereby impacting net margins and deterring enterprise and government clients from fully adopting its cloud services in the future.
  
• The commoditization of civil engineering and infrastructure design software in the coming years, combined with rapidly advancing AI-driven solutions, could disrupt Bentley's legacy products and force expensive, ongoing reengineering efforts, putting further pressure on both gross margins and sustainable earnings growth even as recurring revenue models mature.

Bentley Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bentley Systems compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bentley Systems's revenue will grow by 9.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 18.5% today to 27.0% in 3 years time.
• The bearish analysts expect earnings to reach $493.3 million (and earnings per share of $1.5) by about August 2028, up from $255.8 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 33.3x on those 2028 earnings, down from 70.4x today. This future PE is lower than the current PE for the US Software industry at 39.7x.
• Analysts expect the number of shares outstanding to decline by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

Bentley Systems Future Earnings Per Share Growth

Risks

• Sustained global infrastructure investment and robust public funding in the U.S., Europe, and Asia, with both federal and state initiatives, as well as special defense-related and climate funds, are driving strong demand for Bentley's solutions and could lead to steady or expanding revenues.
  
• High and growing recurring revenue mix-now at 92%-from subscription models and E365, enhanced by multi-year contracts with annual price escalators and strong net retention, increases the company's earnings visibility and resilience, supporting stable net margins and predictable cash flow.
  
• Strategic focus on expanding asset lifecycle offerings, including digital twins and asset analytics, positions Bentley to benefit from the shift towards operations, maintenance, and recurring service needs in infrastructure, driving incremental ARR and higher-margin revenue streams.
  
• Ongoing adoption of advanced technologies such as AI, cloud-based platforms, and integration with major partners like Google are broadening Bentley's market reach, strengthening its competitive position, and opening up new growth opportunities that can boost both top-line growth and gross margins.
  
• Strong geographic diversification, demonstrated by solid growth in India, EMEA, and the Americas (with minimal revenue exposure to volatile markets such as China and Russia), reduces risk from regional economic downturns and supports overall earnings stability and long-term revenue growth.

Valuation

• The assumed bearish price target for Bentley Systems is $42.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Bentley Systems'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 $65.0, and the most bearish reporting a price target of just $42.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $493.3 million, and it would be trading on a PE ratio of 33.3x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $57.12, the bearish analyst price target of $42.0 is 36.0% 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.