Cloud And AI Integration Will Drive Future Opportunities

Key Takeaways

• Strategic focus on cloud-based solutions and AI partnerships positions Teradata for potential revenue growth and improved margins.
  
• Restructuring and leadership changes aim to enhance financial performance through efficient resource deployment and differentiated product solutions.
  
• Staged cloud migrations and competitive pressures could delay revenue growth and challenge Teradata's efforts to expand market share and achieve financial targets.

Catalysts

Provides a connected multi-cloud data platform for enterprise analytics.

• Teradata's strategic focus on cloud-based solutions, with cloud ARR growing 26% year-over-year and a robust cloud net expansion rate of 120%, suggests potential future revenue growth as the cloud business continues to expand.
  
• The integration of advanced AI capabilities and partnerships, such as the bring-your-own language model feature and NVIDIA's AI accelerated computing platform, is expected to enhance the company's product offerings and could lead to improved net margins by increasing the value proposition for customers.
  
• Efforts to drive innovation through new leadership and technology advancements, like the appointment of a new CTO and enhancements in ClearScape Analytics, are anticipated to position Teradata for increased earnings from differentiated product solutions.
  
• Major customer wins, including a strategic move by a U.S. insurance company back to Teradata from competitors, indicate potential revenue growth by regaining market share and expanding penetration into existing accounts.
  
• The ongoing restructuring of Teradata's go-to-market strategy and commitment to deploying resources efficiently are expected to drive improvements in operating margins and overall financial performance as the organization focuses on long-term customer commitments.

Teradata Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Teradata's revenue will grow by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.6% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $157.5 million (and earnings per share of $1.8) by about December 2027, up from $82.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $112.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.6x on those 2027 earnings, down from 38.3x today. This future PE is lower than the current PE for the US Software industry at 42.0x.
• Analysts expect the number of shares outstanding to decline by 2.98% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Teradata Future Earnings Per Share Growth

Risks

• The staged migration of customers to the cloud, instead of larger one-time migrations, may delay potential revenue recognition and growth in cloud ARR, impacting Teradata's overall revenue and future growth projections.
  
• Lower consulting revenue and potential shifts in customer decision-making could continue to offset the growth in recurring revenue, affecting total revenue and profitability.
  
• Execution risks associated with go-to-market restructuring and leadership changes could lead to disruptions in sales effectiveness and delays in achieving financial targets, potentially impacting earnings and overall financial performance.
  
• The competitive landscape, particularly with newer cloud-native competitors like Databricks and Snowflake, may pose challenges in retaining customers and expanding market share, which could affect revenue growth and net margins.
  
• A deceleration in cloud ARR growth and net expansion rates, especially within specific verticals or regions like healthcare and Europe, may signal potential challenges to sustaining revenue growth and achieving long-term financial targets.

Valuation

• The analysts have a consensus price target of $33.0 for Teradata 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 $42.0, and the most bearish reporting a price target of just $26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $157.5 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 7.4%.
• Given the current share price of $32.81, the analyst's price target of $33.0 is 0.6% higher. 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.