AI-Powered Software Acquisition Will Strengthen Command Center Offerings

Key Takeaways

• Strong demand and record backlog position Motorola Solutions for robust revenue growth, supported by expanding cloud and SaaS offerings.
  
• Strategic capital allocation and the Theatro acquisition are set to enhance earnings growth and shareholder returns.
  
• Unfavorable foreign currency rates, acquisition-related margin pressures, and geopolitical challenges could hinder Motorola Solutions' revenue growth and impact financial stability.

Catalysts

Provides public safety and enterprise security solutions in the United States, the United Kingdom, Canada, and internationally.

• The continued robust demand for Motorola Solutions' offerings, along with a record backlog of $14.7 billion, positions the company well for strong revenue growth in the upcoming year.
  
• Growth in Software and Services is expected to be high single digits or double digits when normalized for foreign exchange, driven by cloud adoption and SaaS offerings, which can positively impact recurring revenue and net margins.
  
• Video and Command Center technologies are projected to achieve another year of double-digit growth, with Video expected to grow at 10% to 12% and Command Center at 12%, which will likely strengthen revenue growth.
  
• The company's healthy balance sheet, including over $2 billion in cash and no significant debt maturities until 2028, provides flexibility for strategic capital allocation, potentially enhancing earnings growth and shareholder returns.
  
• The recent acquisition of Theatro, a maker of AI and voice-powered communication software, is expected to strengthen Motorola Solutions' offerings in the Command Center space, potentially driving revenue and earnings growth.

Motorola Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Motorola Solutions's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.6% today to 20.6% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $15.83) by about March 2028, up from $1.6 billion 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 39.2x on those 2028 earnings, down from 44.7x today. This future PE is greater than the current PE for the US Communications industry at 25.7x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.87%, as per the Simply Wall St company report.

Motorola Solutions Future Earnings Per Share Growth

Risks

• The unfavorable foreign currency rates impacted the backlog negatively by $226 million, and future FX headwinds are expected to be about $120 million, which could impact revenues.
  
• The decline in GAAP earnings per share from $9.93 to $9.23 in the prior year primarily due to losses from the settlement of convertible notes could signal financial volatility and potentially impact net margins.
  
• Operating margins in the Software and Services segment decreased primarily due to acquisitions, suggesting that new acquisitions could continue to pressure net margins negatively.
  
• No revenue expectation for 2025 from Ukraine, which experienced a decline in revenue, could lead to reduced revenues and diminish overall earnings projections if alternative revenue sources aren't found.
  
• Adjustments to international trade policies or tariffs could unexpectedly increase expenses or necessitate capital reallocation, affecting net margins if new tariffs impact their manufacturing footprint in Canada or Mexico.

Valuation

• The analysts have a consensus price target of $508.888 for Motorola Solutions 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 $570.0, and the most bearish reporting a price target of just $460.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.8 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 39.2x, assuming you use a discount rate of 6.9%.
• Given the current share price of $421.9, the analyst price target of $508.89 is 17.1% 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.