US Public Sector Woes And Tech Volatility Will Escalate

Key Takeaways

• Conservative government contract renewals and cautious GTS headcount growth suggest limited revenue expansion and an uncertain outlook.
  
• Focused cash usage on buybacks over expansion implies limited reinvestment opportunities, restricting earnings growth projections.
  
• Gartner's diversified growth strategies, strong financial positioning, and global reach indicate potential for sustainable revenue expansion and earnings stability amidst dynamic market conditions.

Catalysts

Operates as a research and advisory company in the United States, Canada, Europe, the Middle East, Africa, and internationally.

• Expectations for government contract renewals appear cautious, particularly concerning the U.S. public sector, which could influence revenue growth negatively if challenges arise within the typically dynamic geopolitical landscape.
  
• The plan includes only mid-single-digit Global Technology Sales headcount growth, suggesting limited sales force expansion which might restrict potential revenue increases and reflect a conservative outlook on GTS growth.
  
• Despite accelerated tech vendor contract value growth, the previously observed boom and subsequent adjustment in venture capital within tech firms could mean potential volatility, affecting both revenue consistency and earnings.
  
• Consultancy revenue growth is conservatively projected at a low single-digit rate as labor-based consulting faces challenges, indicating possible strains on future earnings and revenue contributions from this segment.
  
• The company's decision to prudently use its significant cash reserves primarily for buybacks rather than aggressive expansion or acquisitions may indicate an outlook where the expected ROI from reinvestment opportunities might not support higher earnings growth projections.

Gartner Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Gartner compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Gartner's revenue will grow by 6.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 20.0% today to 13.6% in 3 years time.
• The bearish analysts expect earnings to reach $1.0 billion (and earnings per share of $13.43) by about April 2028, down from $1.3 billion today. The analysts are largely in agreement about this estimate.
• 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 38.3x on those 2028 earnings, up from 24.7x today. This future PE is greater than the current PE for the US IT industry at 33.9x.
• Analysts expect the number of shares outstanding to decline by 1.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

Gartner Future Earnings Per Share Growth

Risks

• Gartner's revenue and contract value growth have been robust, with Global Business Sales contract value increasing by 12% year over year, and strong growth in both enterprise leaders and tech vendors suggests the potential for continued revenue expansion and stabilizing earnings.
  
• The company's research segment, which is the largest and most profitable, is seeing subscription revenue growth of 8% on an FX-neutral basis, indicating a positive outlook for sustained revenue and margin stability.
  
• Gartner's strategy includes strategic investments and expansions in conferences and consulting, with conference revenue growing 17% in the fourth quarter and consulting revenue increasing by 19% year over year, contributing to potential top-line growth and increased earnings.
  
• A strong balance sheet with low levels of leverage and a robust capital allocation strategy, including share repurchases exceeding $735 million, enhance financial flexibility and hold the potential for EPS improvement.
  
• Gartner's business diversification, serving public and private sectors across 74 countries, helps mitigate geopolitical risks and supports stable cash flows and revenue stability in a dynamic environment.

Valuation

• The assumed bearish price target for Gartner is $423.81, which represents one standard deviation below the consensus price target of $486.62. This valuation is based on what can be assumed as the expectations of Gartner'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 $622.0, and the most bearish reporting a price target of just $401.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.6 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 38.3x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $401.65, the bearish analyst price target of $423.81 is 5.2% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts 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.