AI-Driven Modernization Faces Headwinds Yet Long-Term Enterprise Demand Should Strengthen

Catalysts

About CI&T

CI&T provides digital transformation and AI powered technology services that help large enterprises modernize systems and build new data and AI native solutions.

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

• Although enterprises are accelerating large scale modernization of legacy systems and data platforms, these programs remain complex and prone to delay. This could temper CI&T's ability to sustain double digit revenue growth if execution bottlenecks emerge in critical client migrations and moderate top line expansion.
• Despite rising adoption of AI agents and CI&T Flow in client engagements, many customers are still experimenting rather than standardizing at scale. This may slow conversion of the current AI pipeline into durable, higher margin value based contracts and limit upside to earnings.
• While demand for AI driven efficiency in software development and operations can structurally lift productivity, clients could push aggressively for price concessions as productivity gains materialize. This may pressure CI&T's day rates and constrain future net margin expansion.
• Although CI&T is gaining share in fast growing verticals such as financial services and retail, spending patterns in these industries can shift quickly in response to regulation and macro shocks. This may increase revenue volatility and challenge the company’s ability to compound earnings predictably.
• While value based, output based and consumption based pricing models offer long term monetization of intellectual property, procurement inertia and client education hurdles could delay their wider adoption beyond the next 12 to 18 months. As a result, gross margin and EBITDA margin may remain more dependent on traditional time and material engagements.

Assumptions

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

• The bearish analysts are assuming CI&T's revenue will grow by 10.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.8% today to 9.5% in 3 years time.
• The bearish analysts expect earnings to reach $59.8 million (and earnings per share of $0.45) by about December 2028, up from $36.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $94.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, up from 16.1x today. This future PE is lower than the current PE for the US IT industry at 29.9x.
• The bearish 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 14.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid shift toward AI driven automation and value based or consumption based pricing could cause large customers to demand lower unit prices as efficiency gains compound. This may cap CI&T's ability to translate its AI productivity into higher day rates and compress net margins and earnings growth over time.
• CI&T's strategy remains heavily tied to a concentrated base of large enterprise clients and fast growing verticals such as financial services and retail. Any cyclical pullback in digital transformation budgets, regulatory shock, or spending normalization in these industries could slow its double digit organic revenue trajectory and weigh on future earnings.
• The long term opportunity in generative AI hinges on enterprises moving from experimentation to scaled deployment. Management acknowledges that most AI projects across the market are still failing to produce measurable financial impact, which could delay widespread adoption of CI&T Flow and limit the uplift to revenue mix, gross margin and EBITDA margin.
• Scaling a 7,800 person workforce at a 16.3% year over year growth rate and investing ahead of demand, including more than 1,100 new hires this year, increases execution and utilization risk. If revenue growth normalizes while costs remain elevated, adjusted EBITDA margin and net profit margin could fall below the targeted 18% to 20% range.
• Transitioning from traditional time and materials contracts to fixed price, output based and consumption based models requires meaningful changes in client procurement behavior and contractual design. A slower than expected shift or mispricing of early AI engagements could introduce volatility in revenue recognition and constrain earnings expansion in the medium term.

Valuation

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

• The assumed bearish price target for CI&T is $5.49, which represents up to two standard deviations below the consensus price target of $7.07. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.88, and the most bearish reporting a price target of just $5.49.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $628.4 million, earnings will come to $59.8 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 14.1%.
  
• Given the current share price of $4.54, the analyst price target of $5.49 is 17.3% 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.