75% Software Shift Will Unlock Subscriptions While AECO Faces Risks

Key Takeaways

• Trimble's shift to a software and subscription-based model with AI integration is enhancing predictable revenue, expanding markets, and improving margins.
  
• Strong cross-selling initiatives and infrastructure spending opportunities are poised to drive significant revenue growth and profitability despite economic challenges.
  
• Economic and macro uncertainties, tariffs, and longer enterprise sales cycles might dampen demand and revenue growth, affecting Trimble's profitability and public sector opportunities.

Catalysts

Provides technology solutions that enable professionals and field mobile workers to enhance or transform their work processes in North America, Europe, the Asia Pacific, and internationally.

• The strategic transformation into a predominantly software and ARR (Annual Recurring Revenue) focused company, with approximately 75% of the business now software-based, is expected to provide more predictable revenue streams and expand net margins due to lower costs associated with software delivery compared to hardware.
  
• Trimble's AI integration across internal operations and customer-facing solutions is anticipated to boost revenue growth and operational efficiency, which could enhance net margins and earnings.
  
• The company's focus on subscription-based models for machine control and guidance is expanding the addressable market and attracting new customers, potentially increasing revenue through higher customer acquisition and retention.
  
• The management's strong execution of cross-selling opportunities, particularly within the AECO and Transportation segments, with a focus on $1.4 billion in cross-sell opportunities, is expected to drive revenue growth and enhance profitability.
  
• The potential to capitalize on infrastructure spending in regions like Germany, alongside a resilient global positioning in various sectors such as data centers, renewables, and mining, is expected to bolster revenue growth despite macroeconomic uncertainties.

Trimble Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Trimble's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 40.8% today to 6.3% in 3 years time.
• Analysts expect earnings to reach $235.4 million (and earnings per share of $2.24) by about May 2028, down from $1.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 96.2x on those 2028 earnings, up from 10.0x 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 2.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.46%, as per the Simply Wall St company report.

Trimble Future Earnings Per Share Growth

Risks

• Economic uncertainty, highlighted by fears of a downturn due to tariffs and trade policy, could potentially dampen demand and affect future revenues.
  
• With increased macro uncertainty, the company is derisking its guidance by reducing organic growth expectations, which could signal potential lower revenue and profitability.
  
• Longer sales cycles with enterprise clients, especially in construction, might delay or reduce short-term revenue realization, impacting earnings.
  
• Potential continued impact from $10 million quarterly tariffs could pressure net margins, even though the company plans to offset with pricing.
  
• Reduced exposure to government sectors due to trimmed expectations and federal cost cuts could limit revenue growth opportunities in public sector projects.

Valuation

• The analysts have a consensus price target of $82.151 for Trimble 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 $90.0, and the most bearish reporting a price target of just $65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $235.4 million, and it would be trading on a PE ratio of 96.2x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $63.32, the analyst price target of $82.15 is 22.9% 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.