Expansion Into Regulated Sectors Will Boost Demand For Secure Cloud Solutions

Key Takeaways

• Expansion into regulated sectors and international markets is expected to boost revenue through demand for secure, scalable cloud solutions.
  
• Strong focus on subscription revenue, strategic partnerships, and IBM cloud migration positions the company for improved profitability and steady earnings growth.
  
• Heavy reliance on a few large clients for renewals presents revenue predictability risks, while declines in revenue and income challenge financial stability.

Catalysts

Provides data management and cloud solutions in the United States and internationally.

• The company is penetrating high-growth, highly regulated sectors such as insurance, healthcare, and education, which could result in significant revenue growth due to increased demand for secure and scalable cloud solutions.
  
• Expansion into new markets, including the strategic expansion into Chicago and internationally in the U.K., is expected to enhance operational efficiency, increase revenue streams, and solidify the company's global presence.
  
• A focus on recurring subscription revenue and a high client renewal rate (above 90%) suggest a stable revenue foundation, which could lead to improved profitability and predictable earnings growth.
  
• Strategic partnerships, such as with a $1 billion insurance firm and leading healthcare organizations, highlight the company's ability to secure long-term contracts, potentially driving revenue and margin expansion.
  
• The company is well-positioned to capitalize on the IBM cloud migration and is expanding its technical and business development teams to convert interest into new contracts, which could significantly enhance revenue and earnings.

Data Storage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Data Storage's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $4.3 million (and earnings per share of $0.58) by about December 2027, up from $160.3 thousand 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 18.1x on those 2027 earnings, down from 198.2x today. This future PE is lower than the current PE for the US IT industry at 45.0x.
• Analysts expect the number of shares outstanding to grow by 1.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Data Storage Future Earnings Per Share Growth

Risks

• A 3% revenue decline compared to the previous year indicates potential challenges maintaining consistent revenue growth in the short term, which could impact future earnings.
  
• Decrease in revenue from managed services and one-time equipment and software sales may suggest difficulty in sustaining diverse revenue streams, potentially affecting overall revenue and net margins.
  
• Despite efforts to target high-growth industries, increased selling, general, and administrative expenses by 17% might squeeze net margins unless matched by proportional revenue growth.
  
• Decline in net income from $179,000 to $122,000 for the quarter highlights the challenge in maintaining profitability, which could impact the company's financial stability and investor confidence.
  
• Heavy reliance on a few large clients for software and hardware renewals, which are subject to timing variability (lumpiness), presents a risk to predictable revenue generation and could impact cash flow and financial forecasts.

Valuation

• The analysts have a consensus price target of $9.0 for Data Storage 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 2027, revenues will be $32.4 million, earnings will come to $4.3 million, and it would be trading on a PE ratio of 18.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of $4.53, the analyst's price target of $9.0 is 49.7% 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.