Cloud-First Shift And AI Adoption Will Face Setbacks Yet Ultimately Support Steady Progress

Catalysts

About Tyler Technologies

Tyler Technologies provides software and technology services that help public sector agencies modernize operations and deliver digital government services.

What are the underlying business or industry changes driving this perspective?

• Although Tyler is steadily advancing its cloud-first strategy across a large base of 15,000 public sector clients, the pace of on-premises flips and associated uplift could fall short of expectations if budget cycles or IT road maps lengthen. This would delay the realization of higher margin SaaS revenue and earnings.
• While early AI deployments in areas like document automation and resident engagement are showing tangible productivity gains, the public sector's cautious adoption and complex procurement processes may limit near term monetization. This could temper the upside to revenue growth and slow expansion in net margins.
• Although government efficiency mandates and the need to replace aging mission-critical systems support a long runway for modernization, any renewed deferrals of large ERP or Courts & Justice projects would compress the bookings pipeline and push out future recurring revenue and earnings growth.
• While Tyler's payments and transaction-based offerings benefit from increasing digital utilization and new use cases such as inmate services, contract wind downs like Texas highlight concentration and regulatory risk. This could cap transaction revenue growth and introduce volatility in free cash flow.
• Although an active M&A pipeline and proven integration playbook can expand Tyler's product set and cross-sell opportunity, heightened valuation discipline and management bandwidth constraints may limit the scale and timing of accretive deals. This may mute incremental contributions to top line growth and operating margins.

Assumptions

This narrative explores a more pessimistic perspective on Tyler Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Tyler Technologies's revenue will grow by 9.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.7% today to 13.8% in 3 years time.
• The bearish analysts expect earnings to reach $410.6 million (and earnings per share of $9.31) by about December 2028, up from $315.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $558.7 million.
• 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 68.4x on those 2028 earnings, up from 63.0x today. This future PE is greater than the current PE for the US Software industry at 31.9x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.54%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long sales cycles and recent pauses in procurements following post ARPA and other budget noise show that public sector modernization is not linear. Any renewed slowdowns in RFPs, demos or contracting decisions could temper Tyler's ability to sustain around 10% recurring revenue growth and delay the realization of its 20% targeted SaaS growth, putting pressure on revenue and earnings growth trajectories.
• The shift from large new SaaS ARR wins toward a heavier reliance on flips and add-on sales to existing customers increases dependence on an installed base that may eventually saturate. If new logo growth underperforms or large deal timing normalizes downward from the exceptional 2024 levels, total ARR expansion could slow and constrain longer-term earnings compounding.
• Tyler is materially increasing R&D spend, including AI investments and reallocated cloud resources, while also planning more proactive M&A. If these higher operating costs and integration efforts do not translate into differentiated products or pricing power, margin expansion may stall and free cash flow margins could undershoot the 25% to 27% target range over time, weakening earnings leverage.
• Transaction revenues depend on digital payment volumes and contracts such as state-level arrangements in Texas, California parks and inmate services. The planned wind-down of the Texas payments contract, the lumpiness of new statewide wins and regulatory or concentration risks in payments and inmate services could introduce volatility and potentially a structural drag on transaction revenue growth and free cash flow.
• The long-term AI opportunity in government is significant but agencies adopt slowly and face governance, data privacy and workforce constraints. If AI-driven products like document automation, resident engagement and priority-based budgeting ramp more gradually than anticipated or are priced mainly as embedded enhancements rather than standalone value capture, the uplift to revenue, net margins and earnings from AI could be meaningfully lower than implied in bullish expectations for the share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Tyler Technologies is $510.0, which represents up to two standard deviations below the consensus price target of $640.85. This valuation is based on what can be assumed as the expectations of Tyler Technologies'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 $800.0, and the most bearish reporting a price target of just $510.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.0 billion, earnings will come to $410.6 million, and it would be trading on a PE ratio of 68.4x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $461.32, the analyst price target of $510.0 is 9.5% 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.