Digital Transformation And Cybersecurity Trends Will Unlock Market Opportunity

Key Takeaways

• Expansion of high-margin software and federal cybersecurity deals is set to drive sustained margin growth and strengthen long-term cash flows.
  
• Strategic focus on recurring revenue programs and disciplined capital allocation supports durable earnings growth and shareholder value creation.
  
• Heavy dependence on government contracts, intensifying competition, and industry consolidation threaten Telos's revenue stability, growth prospects, and ability to expand beyond the public sector.

Catalysts

Provides cyber, cloud, and enterprise security solutions in the United States and internationally.

• While analyst consensus points to the DMDC program as a key 2025 growth driver, the ongoing shift in DMDC revenue mix towards higher-margin software is likely to produce a sustained and compounding increase in overall company gross and net margins, potentially outpacing current expectations for both margin expansion and incremental EBITDA.
  
• Analysts broadly agree that the TSA PreCheck program expansion is a revenue growth engine, but they may be understating its earnings power; with rapid location expansion and rising enrollments-even as industry renewals are challenged-Telos has a realistic path to well over 33% market share, creating a durable, high-margin, recurring revenue stream that could significantly boost long-term cash flow and earnings.
  
• The strong pipeline of over $4 billion in federal and commercial cybersecurity contract opportunities, driven by rising geopolitical threats and expanding digital modernization mandates, positions Telos for outsized revenue wins and market share gains beyond current programs, supporting multi-year topline and backlog growth.
  
• The recent FedRAMP High Authorization for Xacta and entrenched relationships with key agencies not only secure recurring government demand but lay the groundwork for rapid adoption in high-growth private sector markets as enterprise compliance and cloud security needs escalate, offering an additional vector for revenue acceleration.
  
• Robust free cash flow generation alongside a highly disciplined capital allocation approach-including significant share repurchases and potential for disciplined M&A-are likely to unlock meaningful EPS growth and total shareholder return as operational leverage compounds with scale.

Telos Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Telos compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Telos's revenue will grow by 38.8% annually over the next 3 years.
• Even the bullish analysts are not forecasting that Telos will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Telos's profit margin will increase from -47.5% to the average US Software industry of 13.1% in 3 years.
• If Telos's profit margin were to converge on the industry average, you could expect earnings to reach $40.8 million (and earnings per share of $0.56) by about August 2028, up from $-55.5 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 16.0x on those 2028 earnings, up from -7.4x today. This future PE is lower than the current PE for the US Software industry at 36.5x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.48%, as per the Simply Wall St company report.

Telos Future Earnings Per Share Growth

Risks

• The company's heavy reliance on large federal government contracts, particularly the DMDC program and TSA PreCheck, creates substantial customer concentration risk that could negatively impact revenue stability if federal priorities shift or contracts are lost.
  
• The broader cybersecurity industry is experiencing consolidation, with large organizations increasingly adopting integrated cybersecurity suites, which could make it harder for Telos as a smaller vendor with stand-alone solutions to win new business, thereby pressuring long-term revenue growth and market share.
  
• While recent financials highlight improved gross margin and adjusted EBITDA, these gains are influenced by favorable revenue mix and cost discipline that may not persist, especially as margins are subject to quarter-to-quarter variability, putting future net margins and earnings at risk in the face of rising costs or changing product demand.
  
• Intensifying competition from larger cybersecurity and compliance vendors equipped with greater resources could erode Telos's pricing power, increase customer churn, and result in ongoing pressure on both revenue and margins.
  
• Telos faces execution risk in expanding its portfolio and entering new commercial markets, with current growth and visibility stemming primarily from public sector contracts rather than diversified commercial adoption, increasing the possibility of missed growth targets and underutilized assets, which would ultimately impact both revenue growth and earnings sustainability.

Valuation

• The assumed bullish price target for Telos is $7.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Telos'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 $7.0, and the most bearish reporting a price target of just $4.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $312.1 million, earnings will come to $40.8 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 8.5%.
• Given the current share price of $5.63, the bullish analyst price target of $7.0 is 19.6% 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.