AI And Fare Finder Genie Will Expand Global Presence

Key Takeaways

• AI-driven solutions and innovations like Dynamic Ancillary Pricing and Smart Rebate Management improve pricing strategies, enhancing revenue and margins.
  
• Strategic growth models and partner ecosystems boost market presence and sales, increasing revenue and earnings.
  
• Heavy reliance on AI and travel industry poses risks to revenue and margins, amid economic uncertainties and potential ROI shortfalls from increased market investments.

Catalysts

Provides software solutions that optimize the processes of selling and shopping in the digital economy in Europe, the Asia Pacific, the Middle East, Africa, and internationally.

• PROS Holdings is leveraging AI-driven solutions to innovate and enhance its platform, exemplified by initiatives such as Dynamic Ancillary Pricing and Smart Rebate Management. These innovations are expected to drive revenue growth by optimizing pricing strategies and offering new solutions that appeal to existing and new clients, impacting both revenue and net margins.
  
• The company’s strategic focus on its land, realize, and expand model, along with an increased focus on partner ecosystems, aims to accelerate growth by broadening its market presence and boosting sales efforts. This is anticipated to have a positive impact on revenue and earnings growth.
  
• Investments in generative AI, like the Fare Finder Genie, are enhancing PROS's offerings and could fuel substantial revenue growth in fast-evolving sectors such as travel. By embedding AI deeply into operations, PROS expects to enhance innovation, efficiency, and market value, benefiting both revenue and net margins.
  
• Rising subscription revenue and improved recurring revenue metrics signal strong customer retention and acquisition, which could lead to sustained revenue growth. The continued expansion of free cash flow and gross margins reflects operational efficiencies that may further enhance earnings.
  
• Planned increases in sales and marketing investments, particularly in customer-facing areas, aim to capitalize on growing market opportunities and higher demand, suggesting potential revenue growth, which in turn will contribute to improved profitability and earnings.

PROS Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PROS Holdings's revenue will grow by 9.5% annually over the next 3 years.
• Analysts are not forecasting that PROS Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate PROS Holdings's profit margin will increase from -6.2% to the average US Software industry of 12.0% in 3 years.
• If PROS Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $52.2 million (and earnings per share of $1.06) by about April 2028, up from $-20.5 million 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 38.2x on those 2028 earnings, up from -38.1x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 1.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.65%, as per the Simply Wall St company report.

PROS Holdings Future Earnings Per Share Growth

Risks

• PROS Holdings navigates economic uncertainty, including currency fluctuations, which impacted their subscription ARR by about a percentage point due to the strengthening U.S. dollar. This poses risks to future revenue growth.
  
• The anticipated increase in go-to-market investments in 2025 might not yield the expected sales growth, potentially impacting revenue and net margins if ROI does not meet expectations.
  
• While PROS is investing heavily in AI innovations across their platform, any failure in realizing the expected operational efficiencies or market adoption could adversely affect financial performance, especially revenues and margins.
  
• The company depends heavily on the travel industry for future growth, which is susceptible to economic downturns or geopolitical events that could disrupt airline operations, potentially impacting PROS's earnings.
  
• While the company has made significant improvements in non-GAAP gross margins, there remains a risk that further margin expansion may be limited, which could constrain profitability improvements and future earnings growth.

Valuation

• The analysts have a consensus price target of $31.714 for PROS Holdings 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 $38.0, and the most bearish reporting a price target of just $27.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $433.4 million, earnings will come to $52.2 million, and it would be trading on a PE ratio of 38.2x, assuming you use a discount rate of 8.7%.
• Given the current share price of $16.31, the analyst price target of $31.71 is 48.6% 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.