Cloud Subscriptions Will Mitigate Service Setbacks In 2025

Key Takeaways

• Deceleration in service demand and reliance on efficient implementations could constrain revenue growth, impacting short-term financial stability and margins.
  
• Macroeconomic challenges and foreign exchange headwinds may lead to cautious revenue growth projections, with services and maintenance revenue softness impacting overall earnings.
  
• Manhattan Associates' strong cloud growth, strategic investments, and commitment to innovation suggest potential for robust revenue and market share expansion despite economic headwinds.

Catalysts

Develops, sells, deploys, services, and maintains software solutions to manage supply chains, inventory, and omni-channel operations.

• Approximately 10% of Manhattan Associates' clients with ongoing implementations have scaled back their expected services work for 2025, suggesting a deceleration in demand that could lead to reduced services revenue in the near term.
  
• The company's forward-looking guidance acknowledges a trough in services revenue in Q1 2025, with subsequent service implementation projects only expected to generate revenue growth by mid-year, indicating potential short-term revenue instability.
  
• A reliance on more efficient implementation processes and increased partner utilization may reduce services revenue due to diminished customization needs, potentially impacting net margins while creating pressure on future earnings.
  
• Despite achieving significant growth in cloud subscription revenue, Manhattan Associates anticipates softness in other revenue segments like services and maintenance, leading to overall revenue growth projections that are modest in comparison and could affect the bottom line.
  
• Uncertainty in macroeconomic conditions and a global market characterized by foreign exchange headwinds could adversely affect financial performance and projections, creating a less optimistic outlook for revenue and earnings amidst a challenging environment.

Manhattan Associates Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Manhattan Associates compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Manhattan Associates's revenue will grow by 6.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 20.9% today to 21.0% in 3 years time.
• The bearish analysts expect earnings to reach $263.1 million (and earnings per share of $4.26) by about April 2028, up from $218.4 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 bearish analyst cohort, the company would need to trade at a PE ratio of 49.8x on those 2028 earnings, up from 45.8x today. This future PE is greater than the current PE for the US Software industry at 30.0x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Manhattan Associates Future Earnings Per Share Growth

Risks

• Manhattan Associates exceeded expectations in Q4 2024 with record revenues of $256 million, driven by strong cloud growth of 26%, which may support continued revenue strength.
  
• They are optimistic about a growing market opportunity and the launch of new innovative products like Manhattan Active Supply Chain Planning, which could bolster future revenue streams.
  
• Despite global economic headwinds, Manhattan's strong pipeline and diverse customer base, with more than 80% of existing customers yet to migrate to cloud, indicate potential for sustained revenue growth.
  
• The company’s strategic investments in cloud migration and innovation could drive continued growth in cloud subscription sales, potentially shifting the revenue mix favorably over services.
  
• Consistent R&D investment of nearly $1 billion across supply chain solutions highlights commitment to innovation and could lead to expanded market share and improved earnings through enhanced product offerings.

Valuation

• The assumed bearish price target for Manhattan Associates is $178.49, which represents one standard deviation below the consensus price target of $214.22. This valuation is based on what can be assumed as the expectations of Manhattan Associates's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $270.0, and the most bearish reporting a price target of just $170.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $263.1 million, and it would be trading on a PE ratio of 49.8x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $163.57, the bearish analyst price target of $178.49 is 8.4% higher. The relatively low difference between the current share price and the analyst bearish 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.