Oracle And SAP Solutions Drive Revenue, AI Investments Set To Boost Growth

Key Takeaways

• Enhanced enterprise performance management offerings and AI-driven solutions are poised to boost revenue and project conversion rates across various segments.
  
• Strategic investments in IP and shareholder-focused financial strategies, including acquisitions and buybacks, aim to drive high-margin, recurring revenue and support earnings growth.
  
• Economic headwinds and strategic shifts towards Gen AI pose risks to revenue growth, amidst challenges in e-procurement and SAP Solutions segments.

Catalysts

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

• The notable increase in demand for enterprise performance management offerings due to Oracle's reemphasized sales commitment to this area is expected to drive revenue growth for The Hackett Group's Oracle Solutions segment.
  
• Investments made in the sales segment of the SAP Solutions have started to pay off, with several value-added reseller transactions closed, which should contribute to future revenue increases in this segment.
  
• The launch of the AI XPLR version 2, with enhanced capabilities to simulate enterprise use cases for clients, is anticipated to improve project conversion rates and expand downstream opportunities, positively impacting revenues in the Global Strategy and Business Transformation segment.
  
• Continuous investments in IP-based programs and the integration of Gen AI content into all advisory programs in response to high client demand are expected to drive higher-margin, recurring IP-related services revenue.
  
• Plans to use the strong cash flow and operations for strategic acquisitions and stock buybacks are expected to enhance shareholder value and support earnings per share growth.

Assumptions

• Analysts are assuming Hackett Group's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $46.0 million (and earnings per share of $1.56) by about October 2027, up from $34.7 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 22.5x on those 2027 earnings, up from 20.4x today. This future PE is lower than the current PE for the US IT industry at 44.7x.
• Analysts expect the number of shares outstanding to grow by 2.12% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.08%, as per the Simply Wall St company report.

Risks

• Extended client decision-making and economic headwinds have impacted business transformation engagements, particularly in the e-procurement offerings, negatively affecting the Global Strategy and Business Transformation segment's performance, which could potentially reduce future revenues in this area.
  
• The SAP Solutions segment experienced a decrease in revenues before reimbursements compared to the same period in the prior year, indicating potential challenges in maintaining or growing revenues from this segment.
  
• Although there is strong demand for digital transformation, the company notes the current environment is impacted by high interest rates and demand disruption, potentially affecting clients' investment decisions and, in turn, Hackett Group's project engagements and revenue growth.
  
• The company's aggressive pivot and investments in Gen AI capabilities, while potentially beneficial long-term, carry execution risk and the possibility of not achieving expected conversions from client engagements to revenue-increasing projects in the short term.
  
• The reliance on strategic partnerships to extend AI value capabilities and reach beyond the current Global 1000 focus introduces risks related to dependency on third parties for growth and execution challenges in scaling these partnerships effectively, which could impact future earnings potential.

Valuation

• The analysts have a consensus price target of $29.0 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 2027, revenues will be $345.9 million, earnings will come to $46.0 million, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 7.1%.
• Given the current share price of $25.69, the analyst's price target of $29.0 is 11.4% 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.