Cloud, Cybersecurity And AI Will Open New Markets

Key Takeaways

• Strategic investments in cloud, cybersecurity, and AI are driving revenue growth by focusing on high-margin services and solutions.
  
• Strategic acquisitions and share repurchase initiatives enhance earnings per share through improved offerings and reduced share count.
  
• Economic and policy uncertainties, including tariffs and government spending changes, pose threats to CDW's revenue and long-term growth prospects.

Catalysts

Provides information technology (IT) solutions in the United States, the United Kingdom, and Canada.

• CDW's investment in strategic growth areas like cloud adoption, cybersecurity, IT workflow automation, and AI expertise is expected to drive future revenue growth, particularly through services and cloud solutions, which offer higher margins.
  
• The anticipation of increased demand for client devices, driven by Windows 10 expiration and tariffs, suggests an opportunity for revenue growth, although it may also impact margins due to competitive pricing pressures.
  
• Expansion in high-growth sectors like healthcare, where CDW has made significant strategic investments, is expected to continue contributing to both top-line growth and margin enhancement, given the sector's increasing reliance on cloud and security solutions.
  
• Continued growth in netted down revenue streams, particularly from cloud infrastructure and SaaS, is expected to support margin expansion, given these streams' higher contribution to gross profit (36.5% in Q1).
  
• Strategic acquisitions, such as Mission Cloud Services and ongoing share repurchase initiatives, are expected to enhance earnings per share through improved service offerings and reduced share count.

CDW Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CDW's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 5.8% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $9.97) by about May 2028, up from $1.1 billion 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 24.1x on those 2028 earnings, up from 20.0x today. This future PE is greater than the current PE for the US Electronic industry at 20.0x.
• Analysts expect the number of shares outstanding to decline by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

CDW Future Earnings Per Share Growth

Risks

• Tariff uncertainty is slowing major infrastructure investments, which could impact revenue and profit growth if customers delay or scale back spending due to rising costs. (Revenue, Margins)
  
• Federal government market growth has been subdued due to new policy priorities, suggesting potential budget cuts or changes that could reduce CDW's federal revenue stream. (Revenue)
  
• Potential general economic uncertainty and caution, including unknowns about recessionary conditions, could mute growth and dampen earnings expectations for the full year. (Revenue, Earnings)
  
• Exposure to fluctuations in international markets, like macroeconomic impacts in Canada and political instability, could create volatility and unpredictability in revenue. (Revenue)
  
• Revenue from client devices is experiencing a pull forward due to expected tariff increases, suggesting potential weaker demand in future quarters, affecting long-term revenue growth. (Revenue)

Valuation

• The analysts have a consensus price target of $204.17 for CDW 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 $236.0, and the most bearish reporting a price target of just $160.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $23.1 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $163.93, the analyst price target of $204.17 is 19.7% 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.