Cloud Migration And Cybersecurity Will Expand Future Markets

Key Takeaways

• Shift to integrated IT solutions and managed services is driving higher-margin, recurring revenues and improved customer retention.
  
• Strong pipeline in AI, cybersecurity, and digital infrastructure supports sustained demand and earnings growth.
  
• Heavy reliance on hardware resales and shrinking margins, combined with inventory risks and sector-specific sales declines, threaten long-term profitability and expose structural business weaknesses.

Catalysts

Provides various information technology (IT) solutions worldwide.

• Strong customer backlog and pipeline, especially in advanced technologies such as AI, data center modernization, edge AI, and AI-enabled endpoints, positions the company to capture incremental revenue as organizations increase investments in complex IT infrastructure upgrades and digital transformation initiatives.
  
• Ongoing shift in customer demand from commodity hardware toward integrated IT solutions and managed services, alongside PC Connection's investment in technical capabilities, enhances customer retention and supports a transition to higher-margin, recurring revenue streams, likely improving net margins over time.
  
• Increased focus on cybersecurity, cloud migration, and next-generation architectures is driving pipeline growth and higher-value project rollouts for enterprise, SMB, and public sector clients, which should positively impact near-term and long-term revenues.
  
• Investments in internal productivity tools, AI-driven initiatives, and enhanced e-commerce platforms are beginning to yield operational efficiencies and improved sales force effectiveness, providing room for potential earnings growth and net margin expansion.
  
• Industry-wide refresh cycles, including Windows 11 PC upgrades and server/networking modernization, are leading to sustained demand for core and advanced products, which should stimulate top-line growth and elevate earnings as the refresh cycle continues.

PC Connection Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PC Connection's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $116.0 million (and earnings per share of $4.72) by about August 2028, up from $86.0 million 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 18.2x on those 2028 earnings, down from 18.9x today. This future PE is lower than the current PE for the US Electronic industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 3.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.09%, as per the Simply Wall St company report.

PC Connection Future Earnings Per Share Growth

Risks

• Declining gross margins, particularly due to reductions in partner subscription licensing programs and increasing hardware commoditization, threaten long-term profitability and limit net margin expansion.
  
• Ongoing heavy reliance on hardware resale, with only modest revenue from services or proprietary solutions, exposes the business to industry shifts toward cloud, "as-a-service" models, and direct OEM sales-potentially eroding future revenues and market share.
  
• Cash flow volatility and pressure on working capital, as evidenced by inventory build-up and accounts receivable increases, indicate risk in aligning inventory cycles with customer demand, which could negatively impact earnings and liquidity if demand falls short.
  
• Public Sector net sales saw a double-digit year-over-year decline, highlighting potential customer concentration risk and underlying vulnerability to macroeconomic or budget-driven contractions within large segments, which could drive further revenue and earnings instability.
  
• Flat or deteriorating net income and adjusted EBITDA trends, despite revenue growth, suggest structural challenges with margin improvement due to elevated operating expenses and the high-cost, inventory-intensive sales force model-potentially restricting long-term earnings growth.

Valuation

• The analysts have a consensus price target of $76.0 for PC Connection based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $116.0 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of $64.02, the analyst price target of $76.0 is 15.8% 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.