Expansion Into Gen AI With AI XPLR Platform And LeewayHertz Acquisition Will Shape Future Prospects

Key Takeaways

• Aggressive pivot to Gen AI and strategic acquisitions are set to drive substantial revenue growth and improve gross margins.
  
• Expansion of sales force and unique SaaS offerings create new revenue streams and enhance company valuation and shareholder value.
  
• The company's growth faces challenges due to declining Oracle revenues, e-procurement issues, acquisition costs, and reliance on the uncertain Gen AI market.

Catalysts

Operates as an intellectual property platform-based generative artificial intelligence strategic consulting and executive advisory digital transformation in the United States, Europe, and internationally.

• The Hackett Group's aggressive pivot to Gen AI, including the acquisition of LeewayHertz and the development of their AI XPLR platform, is expected to generate substantial revenue growth as the demand for Gen AI solutions increases, driving top-line expansion.
  
• The integration of Gen AI solutions is anticipated to improve gross margins due to higher-margin Gen AI consulting and implementation revenues, which are more profitable than traditional consulting services.
  
• Strategic investments in expanding the sales force, particularly in the SAP segment, have resulted in significant sales growth, potentially enhancing revenue and earnings going forward.
  
• The joint venture with ZBrain, creating a unique Gen AI Software-as-a-Service offering, is expected to develop a new stream of annual recurring licensing revenues, positively impacting earnings and overall company valuation.
  
• The Hackett Group's plan to use strong cash flows for continued stock buybacks, rather than just debt reduction, aims to enhance Earnings Per Share (EPS) over time, providing additional value to shareholders.

Hackett Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hackett Group's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.7% today to 14.5% in 3 years time.
• Analysts expect earnings to reach $51.7 million (and earnings per share of $1.8) by about April 2028, up from $29.6 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 24.2x on those 2028 earnings, down from 24.3x today. This future PE is lower than the current PE for the US IT industry at 33.9x.
• Analysts expect the number of shares outstanding to grow by 0.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Hackett Group Future Earnings Per Share Growth

Risks

• The decline in Oracle solution revenues due to the post go-live wind-down of a large engagement, along with expectations for continued weakness, could negatively impact overall revenue growth.
  
• Weakness in e-procurement and OneStream implementation offerings, partially offsetting Gen AI revenue growth, poses a risk to achieving consistent revenue increases in those segments.
  
• High upfront costs and expenses associated with acquisitions and stock-based compensation are impacting net margins, despite revenue growth in certain segments.
  
• The reliance on the rapidly evolving Gen AI market, which carries inherent uncertainties, may affect future earnings if the market does not develop as expected or if competition intensifies.
  
• Potential disruptions and pauses in technology investments from clients, especially concerning enterprise applications integrating agentic capabilities, could impact near-term revenue momentum.

Valuation

• The analysts have a consensus price target of $35.667 for Hackett Group 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 $356.0 million, earnings will come to $51.7 million, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 7.8%.
• Given the current share price of $26.03, the analyst price target of $35.67 is 27.0% 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.