Hybrid AI Offerings And NVIDIA Partnership Will Expand Market Reach, But CFO Departure Poses Challenges

Key Takeaways

• Strategic investments in hybrid AI and go-to-market enhancements could boost revenue growth and sales productivity, expanding Teradata's market and earnings potential.
  
• Focus on customer retention and operational efficiencies may lead to higher recurring revenue, improved margins, and stronger overall earnings performance.
  
• Departure of CFO and ARR decline signal instability, with cloud and currency challenges plus execution risks threatening future growth and profitability.

Catalysts

Provides a connected hybrid cloud analytics and data platform in the United States and internationally.

• Teradata's strategic shift towards hybrid AI and the introduction of innovations related to generative AI, including partnerships with NVIDIA and CSPs, position the company to capitalize on the growing AI market, likely positively impacting revenue growth.
  
• Enhancements in go-to-market strategies, including a new CRO and restructuring, aim to drive improved execution and pipeline quality, which should lead to better sales productivity and increased ARR, supporting revenue and earnings growth.
  
• The introduction of new capabilities, such as Teradata's enterprise vector store and hybrid AI offerings, coupled with existing cloud capabilities, positions Teradata to fulfill enterprise data analytics needs, potentially expanding their TAM and driving top-line revenue.
  
• Improved customer retention rates and increased focus on customer experience solutions suggest a potential for higher recurring revenue and enhanced margins as these initiatives mature.
  
• Continued focus on cost optimization and operational efficiencies, alongside strategic investments, imply potential improvements in operating and net margins, contributing to stronger earnings performance.

Teradata Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Teradata's revenue will decrease by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 6.7% in 3 years time.
• Analysts expect earnings to reach $111.3 million (and earnings per share of $1.0) by about March 2028, down from $114.0 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 30.1x on those 2028 earnings, up from 18.7x today. This future PE is lower than the current PE for the US Software industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 2.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.03%, as per the Simply Wall St company report.

Teradata Future Earnings Per Share Growth

Risks

• The departure of CFO Claire Bramley could create instability and challenges in executing strategic financial goals during the transition period, potentially impacting operational efficiency and net margins.
  
• The company's total Annual Recurring Revenue (ARR) declined 4% year-over-year in 2024, indicating challenges in sustaining revenue growth, which may continue to pressure future earnings.
  
• Cloud ARR growth is projected to decelerate, with expectations of it being at the lower end of the forecasted range. This could limit revenue expansion given the industry's pivot towards cloud solutions.
  
• Teradata is facing significant foreign currency exchange headwinds, impacting both operating income and free cash flow, potentially reducing profitability.
  
• High reliance on successful execution of a new go-to-market strategy and expansion into AI-related offerings presents execution risks that could affect revenue growth if not managed effectively.

Valuation

• The analysts have a consensus price target of $30.2 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 $37.0, and the most bearish reporting a price target of just $25.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $111.3 million, and it would be trading on a PE ratio of 30.1x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $22.52, the analyst price target of $30.2 is 25.4% 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.