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Hybrid Cloud Expansion And AI Innovations Propel Competitive Edge And Profit Growth

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WarrenAINot Invested
Based on Analyst Price Targets

Published

September 09 2024

Updated

September 09 2024

Narratives are currently in beta

Key Takeaways

  • Teradata's focus on cloud capabilities and introduction of new products in data and AI markets signify a drive for innovation and expanded customer base.
  • Strategic operational adjustments and commitment to reducing operating expenses are positioned to enhance sales performance, efficiency, and overall profitability.
  • Teradata faces operational and financial challenges, including a potential impact on profit margins, revenue growth, and investor confidence due to various strategic adjustments.

Catalysts

About Teradata
    Provides a connected multi-cloud data platform for enterprise analytics.
What are the underlying business or industry changes driving this perspective?
  • Teradata's strong performance in cloud, with a 32% cloud Annual Recurring Revenue (ARR) growth in constant currency, demonstrates a growing interest in hybrid cloud capabilities, impacting future revenue growth.
  • The company's cloud net expansion rate of 123% and the doubling of 8-figure cloud ARR customers year-over-year indicate an increasing customer expansion within Teradata's cloud services, likely affecting future earnings positively.
  • Introduction of new products like Teradata VantageCloud Lake on Google Cloud and Teradata AI Unlimited, which enhance the company’s competitiveness in data and AI markets, potentially boosting revenue from new and existing customers.
  • Realignment and restructuring within the go-to-market organization aim to increase effectiveness and efficiency, with a potential positive impact on sales performance and cost management, thereby boosting net margins.
  • Commitment to reducing operating expenses, including a reduction in headcount by approximately 9% to 10%, aimed at protecting earnings and free cash flow, may positively influence the company's profitability and ability to invest in growth areas.

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Teradata's revenue will decrease by 0.0% annually over the next 3 years.
  • Analysts assume that profit margins will increase from 3.5% today to 9.4% in 3 years time.
  • Analysts expect earnings to reach $169.5 million (and earnings per share of $1.53) by about September 2027, up from $62.0 million today.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2027 earnings, down from 42.5x today. This future PE is lower than the current PE for the US Software industry at 34.9x.
  • Analysts expect the number of shares outstanding to decline by 3.8% per year for the next 3 years.
  • To value all of this in today's dollars, we will use a discount rate of 7.1%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?
  • The comprehensive review and actions taken to improve results, including cost reduction, indicate operational and financial challenges that could impact profit margins and operational efficiency.
  • Teradata's acknowledgment of longer customer decision cycles and a challenging industry macro environment may lead to delays in revenue recognition and negatively affect short-term revenue growth.
  • The reset of financial outlook for the rest of the year and into 2025 suggests potential uncertainty in achieving previously set financial targets, which could impact investor confidence and share price.
  • Decrease in total Annual Recurring Revenue (ARR) by 3% year-over-year, despite cloud ARR growth, reflects a possible risk in the core business stability and growth, impacting overall revenue sustainability.
  • Planned reduction in headcount of approximately 9% to 10% could affect the company's operational capabilities and innovation potential, potentially hindering growth and competitive positioning in the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $33.4 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 $50.0, and the most bearish reporting a price target of just $24.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.8 billion, earnings will come to $169.5 million, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 7.1%.
  • Given the current share price of $27.4, the analyst's price target of $33.4 is 18.0% 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.
Fair Value
US$33.4
9.7% undervalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture0500m1b2b2b3b2013201620192022202420252027Revenue US$1.8bEarnings US$169.5m
% p.a.
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Current revenue growth rate
0.15%
Software revenue growth rate
0.70%
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