AI Resilience And Cloud Sovereignty Tailwinds Will Drive Long Term Upside Potential

Catalysts

About Commvault Systems

Commvault Systems provides data protection, cyber resilience and recovery software and SaaS for enterprises across hybrid and multi cloud environments.

What are the underlying business or industry changes driving this perspective?

• Growing customer focus on cyber resilience in AI driven, hybrid and multi cloud environments is aligning directly with Commvault Cloud Unity and its Metallic AI fabric, which could support subscription revenue and ARR growth as more workloads require always on protection.
• Rising identity based attacks and the central role of systems like Active Directory, Entra ID and Okta are creating a tailwind for Commvault's Identity Resilience offerings. These offerings already rank among its largest SaaS products and have contributed to ARR from identity and resilience offerings representing about 30% of net new ARR, with potential to support higher SaaS ARR and earnings.
• The acceleration of AI adoption and expanding AI data sets, including vector databases and data lakes, is increasing demand for protection of AI workloads. Partnerships such as AWS, Clumio and Pinecone and support across AWS, Azure and Google Cloud may help Commvault capture more cloud native use cases and support SaaS ARR and subscription revenue.
• Customer requirements around data and cloud sovereignty, highlighted by Commvault's launch partner role for AWS European Sovereign Cloud and work with other regional sovereign cloud partners, position the company to serve compliance sensitive workloads. This can support large enterprise deals, subscription revenue and potentially gross margins given the software heavy mix.
• A growing base of over 14,000 subscription customers and more than 9,000 SaaS customers, combined with record land and expand performance, higher enterprise deal sizes and nearly half of enterprise SaaS customers using more than one offering, provides a larger pool for cross sell on the Unity platform. This can support subscription ARR, net dollar retention and EBIT margin.

Assumptions

This narrative explores a more optimistic perspective on Commvault Systems compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Commvault Systems's revenue will grow by 14.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.6% today to 13.1% in 3 years time.
• The bullish analysts expect earnings to reach $222.6 million (and earnings per share of $4.85) by about January 2029, up from $87.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $108.6 million.
• 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 47.9x on those 2029 earnings, up from 45.5x today. This future PE is greater than the current PE for the US Software industry at 30.1x.
• The bullish analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.07%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Commvault is leaning heavily into AI driven data protection, Identity Resilience and large scale cloud recovery. However, these areas are attracting intense competition from security, backup and cloud platform vendors, which could make it harder to win or retain large enterprise workloads over time and put pressure on revenue growth and subscription ARR.
• The business is becoming more dependent on SaaS and subscription ARR. At the same time, management highlighted quarter to quarter variability in net new ARR, term duration and SaaS net dollar retention, and a growing mix of lower ASP SaaS land deals. This combination could result in slower ARR expansion than investors expect and weigh on earnings and EBIT margin if sales and product investment need to stay elevated to support growth.
• Commvault’s Unity and ResOps positioning relies on tight partnerships with large cloud providers such as AWS, Azure and Google Cloud, as well as ecosystem partners like Clumio and Pinecone. Any shift in partner priorities, competing native services or changes in joint go to market could limit Commvault’s share of cloud native and AI workloads and affect subscription revenue and SaaS ARR.
• The company is running cost optimization and restructuring programs while also pushing an expansive product roadmap that includes Unity, Identity Resilience, AI workload protection and data and cloud sovereignty capabilities. If execution on these parallel efforts is uneven, it could dilute product focus, slow delivery of new features and eventually pressure net dollar retention, gross margin and free cash flow.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Commvault Systems is $185.0, which represents up to two standard deviations above the consensus price target of $145.92. This valuation is based on what can be assumed as the expectations of Commvault 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 $185.0, and the most bearish reporting a price target of just $100.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $1.7 billion, earnings will come to $222.6 million, and it would be trading on a PE ratio of 47.9x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $89.85, the analyst price target of $185.0 is 51.4% 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.