AI Integration And Strategic Growth Power Exciting North American Expansion

Key Takeaways

• ePlus's strategic acquisitions and service expansions, particularly in IT integration and AI, boost future revenue potential and market presence.
  
• Strong growth in managed services and security practices indicates profitable revenue streams and underscores demand for IT and data security solutions.
  
• Shifts in revenue models, economic uncertainty, higher expenses, and sales declines threaten ePlus’s revenue growth and earnings stability.

Catalysts

Provides information technology (IT) solutions that enable organizations to optimize their IT environment and supply chain processes in the United States and internationally.

• The acquisition of Bailiwick enhances ePlus's service offerings, particularly in IT integration services that focus on AI, digital signage, and EV charging, expanding their solutions and customer base across North America and enhancing future revenue potential.
  
• Strong growth in the services segment, with managed services revenue up 28% year-over-year and bookings up 48% over the trailing 12 months, indicates a shift towards more predictable and profitable revenue streams, positively affecting future earnings.
  
• Expansion into AI through initiatives such as the AI Ignite program and the AI Experience Center suggests potential future growth in this high-demand area, which could lead to increased revenue and margins as AI adoption increases.
  
• Continued growth in the security practice, evidenced by a 15.8% increase in security gross billings, highlights a strong demand for data security and governance, which is likely to contribute positively to future revenue.
  
• Capital allocation priorities, including investments in organic growth, strategic acquisitions, and share repurchase programs, suggest a focus on enhancing shareholder value and supporting earnings growth over the long term.

ePlus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ePlus's revenue will grow by 8.1% 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 $155.8 million (and earnings per share of $5.96) by about November 2027, up from $107.9 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 18.4x on those 2027 earnings, down from 19.6x today. This future PE is lower than the current PE for the US Electronic industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 0.5% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

ePlus Future Earnings Per Share Growth

Risks

• The shift towards ratable revenue models and netted down revenues may lead to decreased product sales, impacting overall revenue figures negatively.
  
• There is ongoing economic uncertainty, which could dampen enterprise demand and delay spending decisions, affecting ePlus's sales growth and revenue.
  
• The transition related to AI has elongated sales cycles, which could delay revenue recognition and impact short-term earnings.
  
• Increased SG&A expenses due to acquisitions and higher headcount could continue to suppress operating income and net margins.
  
• Continuous declines in product sales compared to last year, especially after the previous supply chain easing, pose a risk to current revenue levels and earnings stability.

Valuation

• The analysts have a consensus price target of $89.5 for ePlus 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 2027, revenues will be $2.7 billion, earnings will come to $155.8 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 7.2%.
• Given the current share price of $79.53, the analyst's price target of $89.5 is 11.1% 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.