AI And Acquisitions Will Transform Digital Engineering

Key Takeaways

• Focus on AI-driven product innovation and strategic acquisitions is expected to boost revenue growth by meeting industry demand and expanding market opportunities.
  
• High subscription revenue model enhances predictability in revenue growth, aligning with goals of sustainable earnings and improved operational efficiencies.
  
• Economic and strategic challenges in key markets, along with integration risks from acquisitions and leadership changes, threaten Bentley Systems' revenue and earnings consistency.

Catalysts

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

• Bentley Systems' focus on AI-driven product innovation, including AI-powered infrastructure engineering applications like OpenSite Plus and Bentley Asset Analytics, is anticipated to drive sustained revenue growth by meeting rising industry demand for digital and AI-enhanced solutions in engineering and asset management.
  
• Strategic acquisitions like Cesium, which complements Bentley's geospatial digital twin ecosystem, are expected to expand market opportunities and integrate new capabilities, thus potentially boosting recurring revenue streams and enhancing net margins through value-added services.
  
• The high subscription revenue model, already comprising 90% of total revenues, increases predictability and consistency in revenue growth. This model aligns with the company's goal of maintaining low double-digit ARR growth and targeting 100 basis points of annual margin expansion, potentially improving overall earnings sustainability.
  
• Anticipated regulatory changes, such as permitting reform in the U.S. for infrastructure projects, may accelerate demand for Bentley’s products in sectors like power transmission and mining, leading to potential increases in consumption and ARR growth, especially within its power line systems and asset analysis solutions.
  
• Organizational realignment, including the appointment of a new COO experienced in AI and technology, is expected to drive operational efficiencies and foster innovation. This may result in higher operating margins and improved execution of growth initiatives across global markets, thereby enhancing earnings potential.

Bentley Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Bentley Systems compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Bentley Systems's revenue will grow by 9.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 17.4% today to 25.8% in 3 years time.
• The bullish analysts expect earnings to reach $463.3 million (and earnings per share of $1.39) by about April 2028, up from $234.8 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 bullish analyst cohort, the company would need to trade at a PE ratio of 50.0x on those 2028 earnings, down from 57.8x today. This future PE is greater than the current PE for the US Software industry at 29.2x.
• Analysts expect the number of shares outstanding to decline by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.85%, as per the Simply Wall St company report.

Bentley Systems Future Earnings Per Share Growth

Risks

• The company's performance in China, a significant market, faces ongoing headwinds due to soft economic conditions and a shift in state-owned enterprises' preferences for local software and perpetual licenses. This is expected to result in a decline of annual recurring revenue, impacting overall revenue growth.
  
• There is a concern regarding professional services revenues, which add volatility and subtract from profitability, suggesting that maximizing this revenue stream might not be in the company's best interest due to its impact on net margins.
  
• Uncertainties around macroeconomic conditions, such as federal spending changes in the U.S. and economic slowdown in China, may lead to inconsistent demand in key markets, affecting revenue stability and earnings consistency.
  
• The introduction of new leadership roles and organizational changes, while aimed at driving innovation, also come with execution risks that could affect strategic initiatives' effectiveness and overall earnings growth if not managed well.
  
• The company's strategic reliance on acquisitions for growth could potentially impact financials negatively if acquisition integration fails to yield expected synergies, impacting revenue growth and potentially leading to increased operational costs, which would affect net margins and earnings.

Valuation

• The assumed bullish price target for Bentley Systems is $59.2, which represents one standard deviation above the consensus price target of $52.4. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $63.0, and the most bearish reporting a price target of just $42.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $463.3 million, and it would be trading on a PE ratio of 50.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $43.0, the bullish analyst price target of $59.2 is 27.4% 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.