Cloud Adoption And Embedded AI Agents Will Support Steadier Long Term Performance

Catalysts

About Manhattan Associates

Manhattan Associates provides cloud based software that helps customers manage warehouses, transportation, order management, stores and supply chain planning.

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

• Adoption of the Manhattan Active cloud platform, with RPO of US$2.47b and contract durations of about 5.5 to 6 years, supports more recurring subscription revenue visibility and can influence future revenue and earnings quality.
• Three consecutive quarters of record bookings, supported by a win rate above 70% and a mix of new logos and expansions, points to healthy demand across end markets and can affect revenue growth and operating leverage.
• Customer interest in embedded AI agents that reduce short picks, late shipments and order cycle times, already used by more than 10% of the Active installed base with 100% pilot to subscription conversion so far, can support cloud revenue and potentially net margins as AI is deployed with limited implementation effort.
• The Editions packaging of Manhattan Active into Essentials, Enterprise and Enterprise Premier tiers broadens reach into smaller sites and mid market customers, which can increase deal volume, cross sell opportunities and total cloud revenue over time.
• Dedicated on prem to cloud conversion, renewals and product focused sales teams, together with a maturing partner ecosystem that has increased partner sourced deals about 4x year over year, can support higher bookings, RPO and ultimately earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Manhattan Associates's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.7% today to 21.5% in 3 years time.
• Analysts expect earnings to reach $306.7 million (and earnings per share of $4.95) by about September 2029, up from $210.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 48.0x on those 2029 earnings, down from 57.7x today. This future PE is greater than the current PE for the US Software industry at 29.8x.
• Analysts expect the number of shares outstanding to decline by 3.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.6%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Cloud adoption and embedded AI agents are already contributing to a ramp in subscription revenue and RPO at Manhattan Associates, and if customers continue to see large operational gains such as materially lower short picks, late shipments and order cycle times, this could underpin stronger long term revenue growth than a flat share price view assumes, which would also influence earnings.
• The Editions packaging of the Manhattan Active platform into Essentials, Enterprise and Enterprise Premier tiers, combined with a maturing partner ecosystem and a 4x increase in partner sourced deals year over year, expands the company’s addressable market into smaller sites and mid market customers globally, which can lift deal volumes and cross sell activity and therefore affect revenue and long run net margins.
• Dedicated teams for on prem to cloud conversions, renewals and product focused sales, together with a large installed base that is only partially converted so far and cloud bookings where more than 40% came from conversions, create a multi year internal growth engine that could support higher recurring revenue and earnings than implied by an expectation that the share price will stay flat.
• Management is prioritizing sustainable double digit top line growth and top quartile operating margins relative to enterprise software peers, and is reallocating spend away from legacy areas into higher growth subscriptions while still targeting margin expansion over time, which may support higher earnings and free cash flow than a stable share price view suggests.

Valuation

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

• The analysts have a consensus price target of $217.7 for Manhattan Associates based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $260.0, and the most bearish reporting a price target of just $180.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $1.4 billion, earnings will come to $306.7 million, and it would be trading on a PE ratio of 48.0x, assuming you use a discount rate of 8.6%.
• Given the current share price of $207.92, the analyst price target of $217.7 is 4.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.