AI Infrastructure Demand Will Drive Long Term Earnings Expansion

Catalysts

About Ingram Micro Holding

Ingram Micro Holding is a global technology distributor and solutions provider that connects vendors, partners and end customers across hardware, software, cloud and AI enabled services.

What are the underlying business or industry changes driving this perspective?

• Rapid adoption of AI driven enterprise solutions, supported by Xvantage, IDA and the new Sales Briefing Assistant, is expected to convert current proof of concept activity into scaled deployments that lift advanced solutions and services revenue while supporting higher quality earnings over time.
• Expanding AI centric GPU, server and storage demand, even at lower unit margins, positions Ingram Micro at the center of next generation infrastructure spending, which should sustain top line growth and drive attractive returns on invested capital that support long term earnings expansion.
• Growing global penetration of the Xvantage digital platform and automation benefits are structurally lowering cost to serve, which should translate into continued operating expense leverage and improving operating margins as volumes scale.
• Reacceleration in higher margin SMB demand, enabled by Xvantage’s single pane of glass and integrations hub, is likely to improve overall gross margin mix and support faster growth in non GAAP net income relative to revenue.
• Strength in cloud, cybersecurity and Infrastructure as a Service across regions, combined with normalization of working capital after recent inventory investments, should enhance cash generation and support steady dividend growth and potential deleveraging that benefit equity value.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Ingram Micro Holding's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 1.3% in 3 years time.
• Analysts expect earnings to reach $694.0 million (and earnings per share of $2.84) by about December 2028, up from $289.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the US Electronic industry at 23.5x.
• Analysts expect the number of shares outstanding to grow by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.79%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current strength in PCs, notebooks and desktops is late cycle, and management already characterizes the PC refresh as being in the back half. A slowdown in this traditional hardware demand as AI PC penetration normalizes could pressure top line growth and reduce earnings momentum.
• Ingram Micro is leaning heavily into large GPU, server and storage deals that are deliberately transacted at low margin and low cost to serve. If these deals continue to outgrow higher margin categories like SMB and certain cloud workloads, they could structurally cap gross margin expansion and limit net income growth.
• Cloud revenues are only growing low single digits after divestitures and are being diluted by mix shifts toward product sales recorded on a net basis. If the long term shift in IT spending toward cloud and software continues while Ingram’s cloud growth lags, overall revenue growth and operating leverage could underperform expectations.
• The business model requires elevated working capital and inventory investment to support rising hardware and AI infrastructure demand, and net working capital days are already higher than last year and leverage is above two times. Any sustained tightening in credit or slower sell through could constrain free cash flow and weigh on equity value.
• The company’s AI centric platforms Xvantage, IDA and the new Sales Briefing Assistant are key to its long term narrative. If customers are slower than expected to move from AI proof of concepts to scaled deployments, or competing ecosystems from hyperscalers and vendors disintermediate distribution, the anticipated uplift in revenue mix, operating expense leverage and earnings could fail to materialize.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $25.42 for Ingram Micro Holding 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 $32.0, and the most bearish reporting a price target of just $22.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $52.2 billion, earnings will come to $694.0 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of $21.42, the analyst price target of $25.42 is 15.7% 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.