AI Infrastructure Buildout And Rising Integration Complexity Will Drive Long Term Upside

Catalysts

About TSS

TSS designs, integrates and manages high density AI and high performance computing infrastructure for leading data center customers.

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

• Rapidly expanding AI and high performance computing buildouts at cloud and enterprise data centers are driving sustained demand for AI rack integration, which may support multi year revenue growth and higher adjusted EBITDA as volumes ramp into 2026 and beyond.
• Industry migration from AI training only environments toward a mix of training, inference and hybrid or edge deployments increases the complexity and value of integration services, which can improve systems integration pricing power and segment net margins over time.
• Significant upfront investments in power capacity and state of the art Georgetown integration capabilities create near term margin drag, but as utilization increases, fixed power and depreciation costs are leveraged over larger volumes, potentially boosting operating margins and earnings.
• Growing customer diversification through facilities management, modular data centers and potential joint ventures or acquisitions broadens revenue streams tied to AI and edge infrastructure, which may reduce concentration risk and support more stable cash flow and EBITDA.
• A strengthened balance sheet from recent equity capital and expected tenant improvement reimbursements enables TSS to pursue M&A and capacity expansions aligned with accelerating AI infrastructure spending, which can support faster revenue growth and expanded earnings multiples.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming TSS's revenue will decrease by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 8.6% in 3 years time.
• Analysts expect earnings to reach $13.9 million (and earnings per share of $0.42) by about December 2028, up from $4.9 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 49.9x on those 2028 earnings, down from 52.6x today. This future PE is greater than the current PE for the US IT industry at 28.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The heavy concentration of procurement revenues in U.S. federal government contracts exposes TSS to shutdowns, budget delays and policy changes. These can disrupt deal timing, depress procurement volumes and create extended periods of weak revenue and earnings visibility, directly weighing on consolidated revenue and net income.
• The Georgetown facility requires large fixed power, depreciation and staffing commitments that are currently under-absorbed. If rack volumes ramp slower than management expects or customers divert work elsewhere, the company could be locked into structurally lower Systems integration margins and weaker operating leverage, reducing future gross margin and EBITDA.
• The long-term AI infrastructure cycle may shift toward more standardized, lower complexity solutions or a broader mix of vendors. This could compress pricing power for high-density rack integration services and intensify competition from OEMs and other integrators, pressuring Systems integration revenue growth and net margins.
• Execution risk around expansion plans, including potential acquisitions, joint ventures and diversification beyond Dell, raises the chance of overpaying for assets, integration setbacks or strategic missteps. These factors could dilute returns on the recently raised equity capital and drag on earnings and return on invested capital.
• Reliance on a single primary OEM customer for most Systems integration volume creates structural customer concentration risk. Any change in that partner’s AI roadmap, insourcing decisions or vendor strategy could materially reduce rack volumes, leading to lower segment revenue, underutilized capacity and weaker overall earnings.

Valuation

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

• The analysts have a consensus price target of $15.0 for TSS based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $162.7 million, earnings will come to $13.9 million, and it would be trading on a PE ratio of 49.9x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $8.9, the analyst price target of $15.0 is 40.7% 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.