Expanding AI And Consulting Services May Boost Prospects, But Geopolitical Challenges Persist

Key Takeaways

• Strategic expansion in sales headcount and AI sector focus could drive revenue growth and new client acquisitions.
  
• Share repurchases and strong segment growth are expected to boost earnings per share and stock value.
  
• Geopolitical tensions, economic shifts, and foreign exchange issues pose risks to Gartner's growth and earnings stability across global and public sector markets.

Catalysts

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

• Gartner plans to continue expanding its sales headcount, particularly in Global Business Sales (GBS), with double-digit growth anticipated for 2025. This expansion could enhance revenue growth by increasing their market reach and new client acquisitions.
  
• The company aims to capitalize on strong growth in the AI sector by helping enterprises implement AI solutions, potentially boosting Gartner’s Research segment revenue as enterprises seek guidance on leveraging AI technologies.
  
• Gartner is experiencing accelerating contract value growth in their Global Technology Sales (GTS) and GBS segments, driven by double-digit growth in specific practice areas. This ongoing momentum is expected to bolster overall revenue and earnings.
  
• Gartner’s focus on returning excess capital to shareholders via share repurchases is likely to enhance earnings per share (EPS) over time, providing an additional catalyst for stock price appreciation.
  
• The company is taking advantage of its Conferences and Consulting segments, which showed significant revenue growth, indicating potential future revenue enhancement and improved net margins as these higher-margin businesses expand.

Gartner Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gartner's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.0% today to 14.4% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $14.83) 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 analysts price target, the company would need to trade at a PE ratio of 41.4x on those 2028 earnings, up from 24.6x 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

• Geopolitical polarization and conflicts, along with supply chain disruptions, may negatively impact Gartner's ability to grow its revenue globally, as these factors contribute to an uncertain and complex business environment.
  
• The U.S. Federal Government's potential changes and budgetary issues could influence Gartner's revenue and growth in its public sector segment, which comprises 5% of its contract value.
  
• The recent strengthening of the U.S. dollar presents a foreign exchange headwind of 2 percentage points to revenue and EBITDA growth, potentially reducing overall earnings if continued currency fluctuations impact financial results unfavorably.
  
• There is a cautious approach to first-quarter contract value and renewal due to higher seasonality and low new business expectations, which could dampen revenue growth if expectations do not align with actual outcomes.
  
• The challenges faced by tech vendors in the past year, though recovering, point to potential cyclicality and market shifts that could affect future growth rates within the Global Technology Sales segment, impacting Gartner's overall earnings stability.

Valuation

• The analysts have a consensus price target of $498.117 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 $401.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.8 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 41.4x, assuming you use a discount rate of 8.0%.
• Given the current share price of $402.29, the analyst price target of $498.12 is 19.2% 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.