Kintsugi AI Investment And E-Invoicing Will Expand Global Reach

Key Takeaways

• Investments in AI and e-invoicing innovations are set to enhance market opportunities and support future revenue and margin growth.
  
• Expanding cloud services and strategic ERP partnerships are driving recurring revenue and broadening customer adoption, contributing to sustained business growth.
  
• AI-driven solutions' limited enterprise impact, compliance challenges, and macroeconomic volatility may hinder revenue growth in e-invoicing and cloud migration segments.

Catalysts

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

• Vertex's equity investment in Kintsugi, a startup focused on AI technology for sales tax compliance in the SMB sector, is expected to enhance Vertex's AI roadmap and broaden market opportunities, potentially improving future revenue growth.
  
• The proliferation of global e-invoicing mandates offers a significant tailwind for Vertex, with major implementations expected in France (late 2026) and Germany (early 2027), likely supporting future revenue growth and margin expansion through increased adoption of Vertex's e-invoicing solutions.
  
• Continued growth in cloud revenue and subscription models, with cloud revenue seeing a significant 29.6% increase, suggests a shift that should drive higher recurring revenue and potentially improve overall margins.
  
• Expanding relationships and recent wins within major ERP ecosystems (SAP, Oracle, Microsoft), along with capabilities like the SAP Accelerator and partnerships like Oracle Accelerators, are expected to drive further customer adoption, expanding Vertex's customer base and increasing revenue.
  
• Strategic initiatives around indirect tax technology, including partnerships and new business wins in sectors like defense manufacturing and real estate investment, are expected to bolster Net Revenue Retention (NRR) and provide steady revenue growth with potential margin improvements.

Vertex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vertex's revenue will grow by 15.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.9% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $81.5 million (and earnings per share of $0.49) by about May 2028, up from $-52.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 121.4x on those 2028 earnings, up from -116.3x today. This future PE is greater than the current PE for the US Software industry at 33.3x.
• Analysts expect the number of shares outstanding to grow by 1.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.77%, as per the Simply Wall St company report.

Vertex Future Earnings Per Share Growth

Risks

• The potential enhancement of AI-driven solutions for small and midsized businesses through the Kintsugi investment may not translate effectively to complex enterprise customers, potentially limiting its impact on revenue growth and margins in the enterprise segment.
  
• There might be challenges in continuously adapting to dynamic and complex e-invoicing mandates and global tax compliance, which could affect operational costs and net margins due to increased R&D and integration expenses.
  
• Increased competition from other e-invoicing providers that focus solely on e-invoicing solutions could pressure pricing and lead to lower revenue growth in this segment.
  
• The ongoing macroeconomic volatility, such as tariff-related supply chain adjustments, could lead to slower transaction volumes and revenue growth in sectors that are more impacted by global trade changes.
  
• There is a concentrated focus on the SAP and Oracle ecosystems, which, while beneficial, introduces risk if there is any slowdown or change in cloud migration patterns in these ecosystems, potentially affecting revenue projections and growth expectations.

Valuation

• The analysts have a consensus price target of $47.035 for Vertex 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 $61.0, and the most bearish reporting a price target of just $31.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $81.5 million, and it would be trading on a PE ratio of 121.4x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $38.7, the analyst price target of $47.04 is 17.7% 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.