Enterprise AI Adoption And Value Based Contracts Will Transform This Underappreciated Compounding Story

Catalysts

About CI&T

CI&T provides digital and AI-focused technology services that help large enterprises modernize systems and build AI enabled products and processes.

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

• Rapid enterprise adoption of generative AI and agent based systems is creating demand for partners that can move pilots into production. CI&T Flow, with 4,700 active agents and very high internal AI tool adoption, is positioned to support larger AI programs, which can support revenue growth and higher value per client.
• The push by financial services, retail and industrial clients to modernize legacy tech stacks and data platforms is aligning with CI&T’s data modernization studio and GenAI tooling. This can support continued engagement depth and sustain revenue and earnings contributions from these verticals.
• Growing interest in value based, fixed price and output based contracts as clients seek clearer links between spend and outcomes gives CI&T room to monetize its intellectual property and AI productivity gains more directly. This can support net margin and adjusted EBITDA margin over time.
• CI&T’s 30 year track record with a large, scaled talent base of more than 7,800 employees and strong ties to universities supports rapid reskilling into AI centric work. This can sustain delivery capacity for its expanding pipeline and support revenue while helping manage delivery costs.
• Expansion with large enterprise customers, including 10 clients above US$10 million in annual revenue and rising cohorts in the US$5 million to US$10 million range, combined with high logo retention, supports recurring project flows and can provide a base for compounding revenue and adjusted net profit.

Assumptions

This narrative explores a more optimistic perspective on CI&T compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming CI&T's revenue will grow by 11.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 7.8% today to 8.8% in 3 years time.
• The bullish analysts expect earnings to reach $56.9 million (and earnings per share of $0.44) by about January 2029, up from $36.6 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 27.0x on those 2029 earnings, up from 15.5x today. This future PE is lower than the current PE for the US IT industry at 30.5x.
• The bullish analysts expect the number of shares outstanding to decline by 2.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If the industry wide pattern of GenAI projects failing to produce measurable financial results persists, the current enthusiasm around CI&T Flow and AI agents might not translate into sustained client spending. This could weigh on revenue growth and future earnings.
• Clients are gradually shifting from time and materials contracts to value based, fixed price and output based models. If CI&T misprices these new constructs or struggles with consumption based models going through complex procurement processes, the company could face pressure on net margins and adjusted EBITDA margin.
• Revenue is concentrated in large accounts, with one top client contributing about 12% of sales and the top 10 clients representing a significant share of the business. Any change in budget, vendor consolidation or reduction in third party spending by a few key customers could have an outsized effect on revenue and adjusted net profit.
• The company has been adding more than 1,100 employees and growing headcount by 16.3% year over year to support its AI offerings. If this enlarged workforce outpaces demand or productivity gains from AI tools, salary and training costs could put pressure on adjusted EBITDA margin and operating cash generation.
• CI&T is expanding across regions and sectors such as financial services, retail, industrial goods, tech and telco. Any slowdown in digital and AI investment, tariff related volatility or competitive pressure in one or more of these verticals could affect organic revenue growth and limit future earnings expansion.

Valuation

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

• The assumed bullish price target for CI&T is $8.68, which represents up to two standard deviations above the consensus price target of $6.93. This valuation is based on what can be assumed as the expectations of CI&T'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 $8.68, and the most bearish reporting a price target of just $5.37.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $646.3 million, earnings will come to $56.9 million, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of $4.36, the analyst price target of $8.68 is 49.8% 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.