The Automotive AI And IoT Ecosystem Will Expand Future Markets

Key Takeaways

• Robust xUI AI platform adoption and strategic partnerships are driving recurring revenue growth, market expansion, and increased pricing power across automotive and non-automotive sectors.
  
• Investment in advanced AI features and open platform architecture is strengthening competitive positioning and supporting margin expansion and earnings stability.
  
• Weakening auto demand, revenue volatility, rising competition, customer concentration, and complex data regulations threaten Cerence's earnings stability, margins, and long-term growth prospects.

Catalysts

Provides AI powered virtual assistants for the mobility/transportation market in the United States, rest of the Americas, Germany, rest of Europe, the Middle East, Africa, Japan, and rest of the Asia-Pacific.

• The ongoing rollout and strong momentum of Cerence's next-generation xUI AI assistant platform across multiple OEMs, including new wins with Volkswagen Group brands and JLR, positions the company to benefit as automakers race to meet rising consumer demand for sophisticated, seamless, multimodal in-car experiences-supporting durable growth in software licensing revenue and higher average selling prices per vehicle.
  
• Expansion of connected vehicle shipments (up 12% YoY) and increasing mix of recurring, usage-based services (e.g., connected services and over-the-air feature upgrades) are transitioning revenue to a more predictable, recurring model with higher long-term visibility, which is likely to support improved gross margins and earnings stability over time.
  
• Strategic partnerships with chip providers like Arm, and new verticals such as the LG television deal, demonstrate Cerence's ability to capitalize on the proliferation of IoT and edge computing by embedding its conversational AI into a growing ecosystem of device types, underpinning future addressable market expansion and incremental revenue streams beyond automotive, positively impacting long-term revenue growth.
  
• Increasing average price per unit (PPU up to $4.91 from $4.47 YoY) driven by deeper customer integration, more feature-rich deployments, and OEM willingness to pay for differentiated, branded in-car AI experiences suggests strengthening pricing power and margin expansion potential over time, helping support net income and free cash flow growth.
  
• Ongoing investment in agentic, large language model-powered features, an open, brand-agnostic platform architecture, and disciplined cost management are strengthening Cerence's competitive moat with global OEMs as the industry shifts toward software-defined vehicles, helping to mitigate competitive risk and support above-market earnings growth as these trends accelerate.

Cerence Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cerence's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -10.5% today to 3.6% in 3 years time.
• Analysts expect earnings to reach $10.2 million (and earnings per share of $0.28) by about September 2028, up from $-25.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 67.3x on those 2028 earnings, up from -16.3x today. This future PE is greater than the current PE for the US Software industry at 36.6x.
• Analysts expect the number of shares outstanding to grow by 1.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.93%, as per the Simply Wall St company report.

Cerence Future Earnings Per Share Growth

Risks

• Cerence's core end-market (global vehicle production) faces long-term secular stagnation and cyclicality; management acknowledged IHS forecasts of vehicle volume declines and ongoing program pushouts, which could structurally limit revenue and scalability, especially if macro vehicle demand continues to weaken or shift toward shared mobility and lower ownership rates.
  
• Heavier reliance on variable license revenue rather than large fixed license deals introduces greater revenue volatility and less earnings predictability in future quarters, while the deliberate move away from upfront contracts could result in uneven cash flows and margin compression during the transition, negatively impacting net margin and earnings stability.
  
• Increasing competition from technology giants (Google, Apple, Amazon, Microsoft, etc.) and the trend for OEMs to seek more in-house solutions or lock in with dominant consumer digital assistants could erode Cerence's market share, pricing power, and future contract renewals, putting downward pressure on both revenue growth and gross margins.
  
• Customer concentration risk remains acute, as evidenced by the importance placed on a few large OEM wins and renewals; losing or seeing reduced business with a major automotive customer could materially reduce revenue and cause substantial earnings swings.
  
• Rapid evolution of data privacy regulations globally and increasing complexity for compliance (GDPR, CCPA, China PIPL, etc.) create the risk of higher operating costs, legal liabilities, or restrictions on data-driven features, threatening the long-term profitability and regulatory flexibility of Cerence's connected AI solutions.

Valuation

• The analysts have a consensus price target of $11.75 for Cerence 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 $16.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $282.6 million, earnings will come to $10.2 million, and it would be trading on a PE ratio of 67.3x, assuming you use a discount rate of 9.9%.
• Given the current share price of $9.67, the analyst price target of $11.75 is 17.7% 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.