AI Infrastructure And Cybersecurity Will Drive Growth While Margins Tighten

Key Takeaways

• Strategic focus on AI, security, and cloud solutions positions ePlus for strong revenue growth and improved margins amid rising demand for digital transformation.
  
• Streamlined operations and recurring service offerings enhance earnings stability, support long-term client relationships, and enable investment in high-growth areas.
  
• Heavy reliance on large, unpredictable deals and concentrated sectors, plus margin and cost pressures, could undermine stable, long-term profitability and earnings growth.

Catalysts

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

• Persistent demand for AI-powered infrastructure, security, and cloud solutions across industries is expected to accelerate, and ePlus's focused investments in AI consultative capabilities and AI-related "plumbing" (compute, networking, security) position the company to capture outsized revenue growth as enterprise adoption of digital transformation initiatives gathers pace.
  
• The widespread adoption of remote/hybrid work models and escalating cybersecurity threats is ensuring continued robust demand for advanced networking and security solutions-core areas where ePlus is seeing double-digit growth and where security now represents 22.8% of gross billings-supporting both top-line revenue expansion and improved margin mix from value-added services.
  
• The transition to a pure-play technology product and services company, following the sale of the financing business, simplifies operations and reduces earnings volatility, allowing management to focus capital on higher-growth, higher-margin areas and unlocking the potential for higher net margins and more consistent earnings over time.
  
• The company's healthy balance sheet, with record cash levels after the financing business sale, enables further investment in organic growth, strategic acquisitions, and expansion into high-growth verticals, all of which can accelerate revenue growth and support long-term EBITDA expansion.
  
• Expansion and momentum in managed services and recurring, subscription-based offerings, evidenced by nearly 50% YoY services revenue growth and recurring revenue traction, are increasing revenue predictability and long-term client relationships, which is likely to contribute to improving net margins and earnings stability.

ePlus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ePlus's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.1% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $78.4 million (and earnings per share of $3.04) by about August 2028, down from $110.9 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 37.2x on those 2028 earnings, up from 17.6x today. This future PE is greater than the current PE for the US Electronic industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

ePlus Future Earnings Per Share Growth

Risks

• ePlus's recent strong revenue growth was partly driven by large, project-specific purchases by certain enterprise customers, which management acknowledges may not be repeatable and should not be modeled as ongoing revenue-a potential risk of future revenue volatility and unpredictability.
  
• Gross margins declined across both product and services segments, primarily due to a higher proportion of lower-margin enterprise deals and acquisitions (like Bailiwick) that provide lower-margin services, leading to margin compression that may persist with competitive pressures or unfavorable product mix, ultimately impacting future net margins and profitability.
  
• The divestiture of ePlus's domestic financing business eliminates a revenue stream and could increase reliance on less predictable, project-based IT products/services sales, heightening exposure to cyclical downturns or lumpy customer demand, which threatens sustained earnings growth if replacement recurring revenue streams do not ramp quickly.
  
• Operating expenses increased significantly, mainly due to higher headcount following acquisitions, which, combined with the ongoing need for investment in rapidly evolving technologies (particularly AI consultative capabilities), could exert further pressure on operating leverage and net earnings if revenue growth moderates.
  
• Customer demand in key verticals remains concentrated: telecom/media/entertainment and SLED together account for 41% of net sales; any spending slowdown or lost key contracts in these sectors could materially impact revenues, highlighting long-term customer concentration risk.

Valuation

• The analysts have a consensus price target of $92.0 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 2028, revenues will be $2.2 billion, earnings will come to $78.4 million, and it would be trading on a PE ratio of 37.2x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $74.03, the analyst price target of $92.0 is 19.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.