AI And SAP S/4HANA Migration Will Strengthen Global Compliance Offerings

Key Takeaways

• Acquisition and strategic ERP focus enhance Vertex's international growth and recurring revenue through improved e-invoicing and digital transformation compliance.
  
• AI-driven product enhancements and service partnerships boost efficiency and long-term margins, despite limited near-term service revenue.
  
• Strategic acquisitions and macroeconomic reliance may pressure profitability and revenue growth, with regulatory unpredictability posing additional risks to consistent performance.

Catalysts

Provides enterprise tax technology solutions for retail trade, wholesale trade, and manufacturing industries in the United States and internationally.

• The acquisition of ecosio enhances Vertex's e-invoicing capabilities and positions it for sustained growth in international markets, aiming to drive future revenue expansion by capitalizing on the increasing regulatory requirements for e-invoicing.
  
• The ongoing integration of AI features like Copilot and smart categorization is anticipated to improve product offerings and efficiency, which could enhance revenue and potentially lead to higher net margins through increased automation and customer satisfaction.
  
• Vertex's strategic focus on the ERP migration super cycle, particularly with SAP's transition to S/4HANA, presents an opportunity to increase its customer base and drive recurring revenue growth by facilitating seamless compliance and integration for enterprises undergoing digital transformations.
  
• Expansion into the e-invoicing market, especially with upcoming mandates in countries like France and Germany, is expected to create significant opportunities for revenue growth as businesses seek compliant solutions.
  
• The strategy to direct more services to implementation partners, though limiting near-term services revenue, is expected to enhance long-term recurring software revenue and streamline operations, ultimately improving margins and free cash flow.

Vertex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vertex's revenue will grow by 14.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $74.3 million (and earnings per share of $0.6) by about December 2027, up from $30.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $87.5 million in earnings, and the most bearish expecting $46.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 116.4x on those 2027 earnings, down from 274.2x today. This future PE is greater than the current PE for the US Software industry at 42.0x.
• Analysts expect the number of shares outstanding to decline by 7.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

Vertex Future Earnings Per Share Growth

Risks

• The recent acquisition of ecosio, although strategic, is expected to be dilutive to adjusted EBITDA by $3 million to $4 million per quarter through 2025. This could impact overall profitability in the near term.
  
• While subscription revenue grew significantly, the transition to channel partners for services could result in reduced services revenue, potentially affecting total revenue growth.
  
• There is a reliance on macroeconomic factors such as ERP migrations and regulatory changes to drive sales, which may not occur as rapidly as anticipated, potentially impacting revenue growth projections.
  
• The unpredictability of regulatory environments and tax legislative changes globally can pose risks that could impact the company’s ability to maintain consistent revenue growth.
  
• The integration process for acquisitions like ecosio and future investments needed to build out their tax content coverage may divert resources and could pressure net margins until fully realized.

Valuation

• The analysts have a consensus price target of $57.36 for Vertex 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 $971.6 million, earnings will come to $74.3 million, and it would be trading on a PE ratio of 116.4x, assuming you use a discount rate of 7.0%.
• Given the current share price of $53.46, the analyst's price target of $57.36 is 6.8% 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.