AI Pricing And Airline Offer Management Will Shape A Cautious Yet Balanced Outlook

Catalysts

About PROS Holdings

PROS Holdings provides AI powered pricing, configure price quote and revenue management software that helps enterprises manage complex commercial decisions across B2B and travel end markets.

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

• Although AI agents and numerical models give PROS a clear product focus, the agents are still in pilot stages and any slower than expected customer adoption or unclear pricing models could limit the uplift to subscription revenue and earnings.
• While airlines are rethinking their tech stacks around offer and order management, long sales cycles and intense competition for best of breed positions may restrict how much of that spend PROS can capture, which could temper growth in travel related revenue and keep margins reliant on existing accounts.
• Even though B2B customers are looking for more precise pricing and offer management because of tariffs and complex input costs, project delays or pauses outside the U.S. can stretch sales cycles and push out new deployments, affecting the timing of ARR additions and cash flow.
• As PROS leans harder on partners such as Commerce and shifts more implementation work to third parties, there is a risk that execution or alignment issues slow joint go to market efforts, which could mute the expected mix shift toward higher margin subscription revenue and limit improvements in overall gross margin.
• Despite efforts to make products easier to deploy and to tighten marketing and sales alignment, the need to invest more in sales and marketing to support top of funnel campaigns and partner activation may constrain adjusted EBITDA margin expansion and delay any scale benefits to net income.

Assumptions

This narrative explores a more pessimistic perspective on PROS Holdings 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 PROS Holdings's revenue will grow by 12.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -3.3% today to 0.4% in 3 years time.
• The bearish analysts expect earnings to reach $2.2 million (and earnings per share of $0.04) by about January 2029, up from $-11.7 million 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 706.1x on those 2029 earnings, up from -96.3x today. This future PE is greater than the current PE for the US Software industry at 32.3x.
• The bearish analysts expect the number of shares outstanding to grow by 1.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.34%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AI agents are only in pilot phases, but if customers adopt them more broadly and PROS settles on a pricing model that ties closer to usage or outcomes, subscription revenue and earnings could move higher than expected over time.
• Airlines are rethinking their tech stacks around offer and order management and are engaging PROS on best of breed offer management. Faster than expected conversion of this interest into contracts could support stronger travel related revenue and improved margins.
• B2B customers, including manufacturers and complex industrials, are already using PROS to manage tariffs, input cost volatility and complex quoting. If this need widens across more verticals, it could support a longer runway for revenue growth and higher recurring gross margins.
• PROS is putting more focus on top of funnel campaigns, tighter alignment between marketing and sales and partner driven distribution with companies like Commerce. If that approach scales, it could lift bookings, accelerate ARR growth and support higher adjusted EBITDA and free cash flow.
• The company reports non GAAP subscription gross margin of 80%, overall non GAAP gross margin of 69% and positive free cash flow guidance of US$40 million to US$44 million. If this mix of high margin recurring revenue and improving cash generation continues, it could support higher earnings and potentially a rerating of the share price.

Valuation

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

• The assumed bearish price target for PROS Holdings is $23.25, which represents up to two standard deviations below the consensus price target of $25.6. This valuation is based on what can be assumed as the expectations of PROS Holdings'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 $35.0, and the most bearish reporting a price target of just $23.25.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $497.1 million, earnings will come to $2.2 million, and it would be trading on a PE ratio of 706.1x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $23.25, the analyst price target of $23.25 is 0.0% different. The relatively low difference between the current share price and the analyst consensus price target indicates that they 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.