Growing Sales And AI Use Will Create Opportunities Despite Risks

Key Takeaways

• Focusing on AI and sales headcount could enhance revenue potential and operational efficiency as economic conditions improve.
  
• Disciplined expense management and stock buybacks might modestly expand margins and significantly boost EPS growth.
  
• Macroeconomic uncertainty, policy changes, and currency fluctuations challenge Gartner's revenue growth and contract renewals, prompting a focus on expense management to maintain margins.

Catalysts

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

• Gartner's plan to grow sales headcount in mid-single digits, outside directly impacted areas, while maintaining focus on sales productivity, suggests potential for future revenue growth enhancement as macroeconomic conditions normalize.
  
• The acceleration in tech vendor contract value growth, especially among larger vendors, points to an improving sales environment and potential revenue increase.
  
• Increasing the implementation of AI to enhance internal operations and future client offerings indicates a focus on innovation that could improve operational efficiency and potentially enhance net margins.
  
• Gartner's focus on disciplined expense management and agile operational approaches suggests potential for modest EBITDA margin expansion due to the natural operating leverage in the business.
  
• Aggressive stock buyback strategy is designed to optimize returns and could significantly boost earnings per share (EPS) growth over time.

Gartner Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gartner's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.8% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $896.4 million (and earnings per share of $13.87) by about May 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 analysts price target, the company would need to trade at a PE ratio of 51.6x on those 2028 earnings, up from 26.6x today. This future PE is greater than the current PE for the US IT industry at 31.8x.
• Analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.01%, as per the Simply Wall St company report.

Gartner Future Earnings Per Share Growth

Risks

• The U.S. federal government, which represents approximately 4% of Gartner’s contract value, has been impacted by policy changes, and nearly all federal contracts are up for renewal in 2025, with around 50% of this business not renewing, potentially affecting revenue and contract renewals.
  
• There is a high level of macroeconomic uncertainty, with factors such as tariff changes impacting business decisions, potentially elongating customer decision-making cycles and impacting contract value and revenue growth.
  
• Gartner's conferences revenue increased, adjusting for conferences moved to Q2, but the highly variable revenue from contract optimization could impact overall revenue consistency.
  
• The current financial environment has led to an increased focus on expense management, indicating potential concerns over maintaining EBITDA margins amidst shifting economic conditions.
  
• The U.S. dollar weakened during Q1, benefiting revenue and EBITDA growth, but further currency fluctuations could impact reported financial results and potentially affect net margins.

Valuation

• The analysts have a consensus price target of $483.017 for Gartner 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 $622.0, and the most bearish reporting a price target of just $400.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.7 billion, earnings will come to $896.4 million, and it would be trading on a PE ratio of 51.6x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $432.92, the analyst price target of $483.02 is 10.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.