AWS And Azure Will Render Legacy Solutions Obsolete

Key Takeaways

• Rapid enterprise migration to integrated cloud platforms and open-source tools threatens Teradata's market share, revenue stability, and long-term growth prospects.
  
• Ongoing price competition and a legacy reputation hinder Teradata's cloud transformation, driving margin erosion and increasing customer churn risk.
  
• Rising enterprise demand for data and AI, cloud-focused growth, innovation, key partnerships, and operational improvements are strengthening Teradata's competitive position, profitability, and recurring revenue base.

Catalysts

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

• The rapid migration of enterprises to cloud-native platforms run by hyperscale providers such as AWS, Azure, and Google threatens to make Teradata's hybrid and legacy solutions obsolete, risking revenue decline as customer retention drops and new business growth falters in the face of better-integrated alternatives.
  
• Fierce price competition and the ongoing commoditization of analytics and data storage services will continue to drive down average contract value for Teradata, likely resulting in persistent downward pressure on both revenues and gross margins as customers demand lower prices or defect to lower-cost offerings.
  
• Teradata's reputation as a legacy, on-premises data warehouse provider continues to hinder its transformation into a cloud-native company, and with more agile, innovative competitors advancing rapidly, market share loss to newer platforms is expected to accelerate, negatively affecting long-term earnings and future top-line growth.
  
• As companies consolidate their software vendors in favor of tightly integrated, full-stack data platforms, Teradata's addressable market may shrink significantly, fueling higher customer churn and causing recurring revenue to stagnate or decline over time, while driving up the cost of customer acquisition.
  
• The accelerating adoption of open-source analytics and AI tools makes differentiation increasingly difficult, leaving Teradata exposed to ongoing customer attrition and margin erosion, especially as its own pace of innovation lags behind industry standards, further weighing on long-term profitability and recurring earnings.

Teradata Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Teradata compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Teradata's revenue will decrease by 2.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 8.1% today to 5.4% in 3 years time.
• The bearish analysts expect earnings to reach $87.3 million (and earnings per share of $0.92) by about July 2028, down from $138.0 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 29.0x on those 2028 earnings, up from 15.4x today. This future PE is lower than the current PE for the US Software industry at 42.7x.
• Analysts expect the number of shares outstanding to decline by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.64%, as per the Simply Wall St company report.

Teradata Future Earnings Per Share Growth

Risks

• Explosive growth in data generation and enterprise focus on advanced analytics and AI is increasing demand for Teradata's high-performance, trusted data platforms and hybrid/multi-cloud solutions, which supports continued growth in recurring revenues and counteracts top-line declines.
  
• The ongoing global digital transformation and proliferation of cloud computing are driving more of Teradata's revenue mix toward cloud and subscription services, which enhances revenue visibility, recurring revenue quality, and gross margin upside, positioning the business for stable long-term profitability.
  
• Teradata's consistent improvements in customer retention rates, new product innovation (such as the Enterprise Vector Store for AI workloads), and recognition as a leader in analyst reports (Forrester Wave) are strengthening the company's competitive position and underpinning future earnings growth.
  
• Strategic partnerships with hyperscalers (AWS, Azure, Google Cloud) and AI leaders (NVIDIA), combined with Teradata's unique hybrid cloud and on-premises capabilities, allow the company to serve regulated and complex enterprise clients, supporting large contract values and increasing customer stickiness, which may positively impact both revenue and margins.
  
• Operational efficiency initiatives, sales force restructuring, and the addition of experienced executive leadership with SaaS transformation expertise are expected to drive improved execution, lower costs, and support margin expansion and earnings growth in the coming years.

Valuation

• The assumed bearish price target for Teradata is $21.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Teradata'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 $28.0, and the most bearish reporting a price target of just $21.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $87.3 million, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 8.6%.
• Given the current share price of $22.2, the bearish analyst price target of $21.0 is 5.7% lower.
• 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.