AI And Automation Catalysts Will Reshape Long Term Earnings Power

Catalysts

About Thomson Reuters

Thomson Reuters provides information, software and workflow tools for legal, tax, audit, risk and news professionals worldwide.

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

• AI driven legal research and workflows, led by Westlaw Advantage and CoCounsel Legal, are gaining traction with customers across large, mid sized and small law firms, which can support recurring revenue growth and higher value per user over time.
• The build out of Agentic AI across Legal, Tax, Audit and Risk products, including plans to bring the full power of Westlaw and Practical Law into CoCounsel and other offerings, is designed to deepen product stickiness and support ACV growth and pricing power.
• Tax and audit platforms such as UltraTax, ONESOURCE, Pagero, SafeSend, SurePrep and Ready to Review or Ready to Advise target rising complexity and talent shortages in tax and accounting, which can underpin volume driven revenue and support net margins through workflow automation.
• Internal AI adoption at scale, with over 85% of employees using AI tools and more than 300 use cases in development, is already affecting software development, customer support and content operations, which management links to planned EBITDA margin expansion through 2028 and stronger earnings.
• Material capital capacity of about US$11b through 2028 and a track record of disciplined bolt on M&A in core franchises position the company to add new capabilities and content sets that can supplement organic revenue and support free cash flow growth.

Assumptions

This narrative explores a more optimistic perspective on Thomson Reuters compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Thomson Reuters's revenue will grow by 8.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 19.8% today to 24.2% in 3 years time.
• The bullish analysts expect earnings to reach $2.3 billion (and earnings per share of $5.96) by about February 2029, up from $1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.0 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 45.9x on those 2029 earnings, up from 26.1x today. This future PE is greater than the current PE for the US Professional Services industry at 18.4x.
• The bullish analysts expect the number of shares outstanding to decline by 1.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AI competition in legal research and workflows is already affecting sentiment, and if general purpose or niche AI tools start to meet professional standards for accuracy, privacy and reliability, Thomson Reuters' content advantage could erode, which would pressure pricing power and slow recurring revenue growth.
• Government customers are already canceling some legal contracts and management expects government growth to slow in early 2026. If this trend persists or extends to other public sector budgets, it could drag on Legal Professionals segment growth and weigh on overall earnings.
• The company is leaning heavily into Agentic AI and internal automation, with more than 300 AI use cases and ongoing severance costs. If the cultural and executional change does not translate into the planned 100 basis points of annual EBITDA margin expansion through 2028, operating leverage and net margins could fall short of expectations.
• The business model depends on premium, highly curated legal and tax content and large in house expert teams. If clients increasingly accept cheaper, good enough AI tools without this depth of content or expertise, Thomson Reuters may face pressure to lower prices or invest more in content, which would hurt net margins and free cash flow.

Valuation

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

• The assumed bullish price target for Thomson Reuters is CA$281.38, which represents up to two standard deviations above the consensus price target of CA$193.47. This valuation is based on what can be assumed as the expectations of Thomson Reuters's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$285.04, and the most bearish reporting a price target of just CA$154.2.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $9.6 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 45.9x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of CA$118.45, the analyst price target of CA$281.38 is 57.9% 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.