Public Cloud Shift Will Erode Legacy Margins And Market Share

Key Takeaways

• Accelerating cloud adoption and direct sales by OEMs threaten CDW’s legacy business model, curbing growth and market share.
  
• Compressed IT budgets, vendor consolidation, and rising compliance costs intensify margin pressures and diminish earnings predictability.
  
• Strategic shift toward high-margin tech services, diverse end-markets, and disciplined capital allocation strengthens profitability, stability, and shareholder returns despite industry and economic shifts.

Catalysts

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

• The accelerating shift by enterprises to public cloud and direct cloud subscriptions is expected to further erode the need for traditional hardware, networking equipment, and value-added reseller services, fundamentally limiting CDW's long-term revenue growth as large portions of IT spend bypass its legacy channels.
  
• Major OEMs and cloud vendors continue to invest heavily in direct-to-customer sales strategies, further cutting out intermediaries like CDW and putting increasing downward pressure on hardware and software sales volumes, which will likely contract CDW’s future market share and impair top-line growth.
  
• With rising global price and wage inflation compressing IT budgets across both commercial and public sector clients, a prolonged period of subdued IT spending is likely, resulting in slower order growth, delayed project cycles, and reduced revenue visibility for CDW, alongside greater risk of margin compression as competition intensifies for price-sensitive deals.
  
• CDW’s business remains heavily reliant on third-party vendors for both hardware and software; ongoing vendor consolidation and an imbalance in pricing power heighten the risk of unfavorable terms for CDW, which threatens both gross margin stability and the predictability of earnings.
  
• As regulatory complexity escalates and compliance burdens rise, CDW faces structurally higher SG&A and operational costs that are difficult to offset in an environment of muted growth and limited operating leverage, putting persistent pressure on net margins and future profitability.

CDW Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on CDW compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming CDW's revenue will grow by 1.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.1% today to 6.1% in 3 years time.
• The bearish analysts expect earnings to reach $1.3 billion (and earnings per share of $9.96) 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 price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, down from 20.0x today. This future PE is lower 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

• Accelerating demand for digital transformation, cloud adoption, cybersecurity, and data-driven solutions is fueling strong and broad-based growth across CDW’s hardware, software, and services offerings, which could support sustained or rising revenues and gross profit over the long term.
  
• The company’s strategic pivot to higher-margin services, recurring cloud and SaaS solutions, and investments in AI expertise and managed/professional services is structurally increasing gross margin resilience and supporting operating income and net margin expansion over time.
  
• CDW maintains a diversified end-market exposure—including commercial, healthcare, education, government, and international channels—each posting strong or improving results, which reduces dependency on any single segment and bolsters overall revenue stability.
  
• Leadership’s commentary and recent results indicate that customers view CDW as a strategic, trusted partner during periods of economic uncertainty or industry disruption, which supports ongoing market share gains, recurring business, and consistent earnings growth.
  
• The company’s robust capital allocation strategy, proven history of raising dividends, material share buybacks, disciplined M&A, and healthy free cash flow conversion all support shareholder returns and can drive sustained earnings per share growth even in less favorable revenue environments.

Valuation

• The assumed bearish price target for CDW is $160.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of CDW'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 $236.0, and the most bearish reporting a price target of just $160.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $21.9 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $163.93, the bearish analyst price target of $160.0 is 2.5% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.