AI Knowledge Adoption Will Drive Strong Long Term Tailwinds For This Undervalued Leader

Catalysts

About eGain

eGain provides AI powered knowledge and agentic automation software that helps large enterprises transform customer service and support operations.

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

• Rapid adoption of AI driven knowledge management in heavily regulated industries such as healthcare, utilities and financial services is positioning eGain as a preferred provider for mission critical, compliance sensitive deployments. This supports sustained double digit SaaS ARR growth and higher quality recurring revenue.
• Enterprises are shifting from experimentation with basic chatbots to demanding trustworthy, transaction capable, agentic AI tied to authoritative knowledge sources. eGain is addressing this gap with its hybrid AI and expert in the loop architecture, which can drive higher win rates, larger deal sizes and accelerating revenue growth.
• Automation of knowledge creation, curation and deployment through the eGain AI Knowledge Method is compressing implementation timelines by up to two to three times and reducing manual effort by an order of magnitude. This can structurally improve gross margins and support continued expansion in operating margins and earnings.
• Growing demand from enterprise AI teams and developers for modular, composable platforms that integrate with multiple large language models aligns directly with the eGain Composer offering. This creates a new, higher velocity channel for platform usage that can lift ARR growth and increase net expansion rates.
• A strengthening partner ecosystem and strategic relationships such as the JPMorgan agreement, together with rising partner interest in AI knowledge solutions, can materially broaden distribution, shorten sales cycles and support durable improvements in revenue growth, cash generation and capital returns.

Assumptions

This narrative explores a more optimistic perspective on eGain 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 eGain's revenue will grow by 5.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 38.2% today to 0.0% in 3 years time.
• The bullish analysts expect earnings to reach $32.3 thousand (and earnings per share of $0.0) by about December 2028, down from $34.4 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 18982.1x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the US Software industry at 32.9x.
• The bullish analysts expect the number of shares outstanding to decline by 3.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Revenue growth remains modest at high single digits over the long term, as indicated by current guidance of 8% revenue growth and a full year outlook of only $90.5 million to $92 million. This suggests that eGain may not fully capitalize on the broader AI adoption wave in customer service, which would constrain long-term revenue scalability and overall earnings power.
• The decision to sunset the messaging platform business and rely more heavily on newer AI Knowledge, AI Agent and Composer offerings increases dependence on emerging products whose long-term adoption is unproven. Any slower than expected uptake by developers, partners or enterprise AI teams would pressure revenue growth and could reverse recent gross margin and net margin gains.
• Management is signaling a plan to step up sales hiring and increase marketing spend in the second half of the fiscal year. Combined with ongoing R&D reinvestment, this could structurally raise the cost base and erode recently improved adjusted EBITDA margins and non GAAP net income if large seven figure Knowledge Hub deals and partner led opportunities take longer than expected to close or scale.
• eGain’s strategy assumes enterprises will standardize on its trusted knowledge back end while retaining flexibility to bring their own AI models. The rapid proliferation of competing agentic AI solutions and native tools from hyperscalers like OpenAI, Azure Copilot and AWS may commoditize parts of the stack, forcing pricing pressure on SaaS contracts and limiting future gross margin expansion and earnings growth.
• The business is increasingly concentrated in regulated, large enterprise and government use cases. Management has already cited delays from a government shutdown and long sales cycles for large Knowledge Hub deals, so any persistent macro, regulatory or budget related disruptions in these segments would increase booking volatility, slow ARR growth and dampen operating cash flow over time.

Valuation

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

• The assumed bullish price target for eGain is $20.0, which represents up to two standard deviations above the consensus price target of $17.5. This valuation is based on what can be assumed as the expectations of eGain'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 $20.0, and the most bearish reporting a price target of just $15.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $106.3 million, earnings will come to $32.3 thousand, and it would be trading on a PE ratio of 18982.1x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $10.34, the analyst price target of $20.0 is 48.3% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.