Generative AI Partnerships With NVIDIA And OpenAI Will Unlock Future Opportunities

Key Takeaways

• Strategic focus on high-margin areas and innovation in Generative AI is expected to enhance profitability and open new revenue opportunities.
  
• Capital return initiatives, such as share buybacks and increased dividends, indicate a commitment to supporting EPS growth and shareholder value.
  
• Amdocs faces challenges in revenue growth due to exiting non-core activities, economic uncertainty, cloud transition, and restructuring expenses impacting short-term earnings.

Catalysts

Through its subsidiaries, provides software and services worldwide.

• Amdocs is experiencing strong momentum in cloud sales, which are expected to continue growing at double-digit rates in fiscal 2025, thereby supporting future revenue growth.
  
• The company is strategically focusing on high-margin areas such as next-generation monetization platforms and Generative AI, which are expected to enhance operating margins and profitability.
  
• By phasing out low-margin, non-core business activities, Amdocs anticipates improving its operating margin to over 21% in fiscal 2025, positively impacting net margins and earnings.
  
• Amdocs' commitment to innovation in areas like Generative AI, supported by partnerships with NVIDIA and OpenAI, is likely to open new revenue opportunities and improve customer experience, contributing to revenue growth.
  
• The company's ongoing share repurchase program and expected increase in dividend payments suggest a focus on returning capital to shareholders, which could support EPS growth.

Amdocs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Amdocs's revenue will grow by 3.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 12.6% in 3 years time.
• Analysts expect earnings to reach $691.2 million (and earnings per share of $5.94) by about January 2028, up from $493.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2028 earnings, up from 19.8x today. This future PE is lower than the current PE for the US IT industry at 43.7x.
• Analysts expect the number of shares outstanding to grow by 1.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.52%, as per the Simply Wall St company report.

Amdocs Future Earnings Per Share Growth

Risks

• Amdocs is phasing out low-margin, non-core business activities which may result in short-term revenue decline as they accounted for $600 million in fiscal 2024. This could impact overall revenue growth.
  
• The macroeconomic and geopolitical uncertainty creates a challenging demand environment, which could slow the conversion of pipeline opportunities into closed deals, affecting revenue growth.
  
• The transition from on-premise to cloud-based services, although showing growth, might not be entirely incremental as it sometimes replaces existing services rather than adding new business, potentially limiting the net revenue increase.
  
• Interest and other expenses, such as adverse foreign currency movements, contributed to an expense line of approximately $7 million, which could impact net income if these movements persist.
  
• The restructuring program, while aimed at long-term profitability, incurs an annual charge of about $83 million, affecting short-term GAAP earnings per share and potentially free cash flow.

Valuation

• The analysts have a consensus price target of $102.5 for Amdocs based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.5 billion, earnings will come to $691.2 million, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 7.5%.
• Given the current share price of $86.74, the analyst's price target of $102.5 is 15.4% 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.