AI-Driven Innovation And Critical Partnerships Propel Company Towards Digital Transformation Success

Key Takeaways

• Strategic focus on AI and core modernization could increase revenue from complex transformation programs and improve operational efficiencies.
  
• Partnerships and expanded delivery in India seek to drive growth by tapping into new markets and client segments.
  
• Declining profitability and regional revenue, coupled with client spending slowdown and acquisition integration challenges, pose risks to revenue growth and net margins.

Catalysts

Provides technology services in North America, Europe, the United Kingdom, and internationally.

• Endava's strategic focus on AI and core modernization positions the company to capitalize on the digital shift that involves deeper integration with client core systems, potentially increasing revenue from larger, complex transformation programs.
  
• The acquisition of GalaxE enhances Endava's core modernization capabilities and integrates proprietary IP into its offerings, which could improve operational efficiencies and net margins.
  
• Strategic partnerships with platforms like USoft and Mambu aim to tap into new markets and client segments, driving growth in revenue and expanding Endava's addressable market.
  
• Expansion of delivery capabilities in India is opening new client spending areas and increasing engagement with potential customers, which could significantly contribute to revenue growth.
  
• Integration of AI-enabled accelerators into client solutions provides a competitive edge by reducing disruption and increasing delivery speed and accuracy, potentially improving profitability and net margins.

Endava Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Endava's revenue will grow by 11.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 8.7% in 3 years time.
• Analysts expect earnings to reach £89.4 million (and earnings per share of £0.89) by about November 2027, up from £7.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £53.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 54.2x on those 2027 earnings, down from 179.5x today. This future PE is greater than the current PE for the US IT industry at 44.3x.
• Analysts expect the number of shares outstanding to grow by 19.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.56%, as per the Simply Wall St company report.

Endava Future Earnings Per Share Growth

Risks

• Endava's profitability is declining, evidenced by a drop in profit before tax and adjusted PBT margin from the previous year, which could impact net margins and earnings.
  
• The longer conversion times for larger, core modernization projects introduce uncertainty and potential delays in revenue recognition and cash flow.
  
• Revenue from key regions such as the UK and other parts of the world is declining, potentially impacting overall revenue growth if not compensated by other markets or verticals.
  
• The slowdown in client spending, especially in verticals like payments, poses a risk to maintaining or increasing revenue growth.
  
• Integrating the recent acquisition of GalaxE may face challenges or delay expected synergies, impacting operating expenses and net margins.

Valuation

• The analysts have a consensus price target of £37.84 for Endava 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 £54.39, and the most bearish reporting a price target of just £29.97.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be £1.0 billion, earnings will come to £89.4 million, and it would be trading on a PE ratio of 54.2x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of £26.74, the analyst's price target of £37.84 is 29.3% 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.