AI Competition And Execution Risks Will Challenge Operations Yet Ultimately Support Long-Term Upside

Catalysts

About Thomson Reuters

Thomson Reuters provides information, software and tools for legal, tax, accounting, corporate and news professionals globally.

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

• Although AI driven products like Westlaw Advantage and CoCounsel are gaining traction with strong customer feedback, the rapid entrance of new AI assistant providers could compress pricing power over time. This may limit the uplift in revenue growth and constrain earnings.
• Although the company is applying AI and automation internally to reengineer how it works and is targeting about 100 basis points of adjusted EBITDA margin expansion in 2026, execution risk around large scale process changes could dilute the expected efficiency gains and hold back net margins.
• While there is growing adoption of AI enabled tax tools such as Ready to Review and Ready to Advise in a profession facing talent shortages, firms that decide to build more solutions in house or rely on APIs instead of end to end products could slow take up of higher value offerings and temper revenue growth.
• Although the company is investing more than US$200 million in AI in 2025 with plans to continue at similar levels into 2026, any slowdown in converting this spend into paid generative AI enabled contracts, which currently account for 24% of annualized contract value, could weigh on earnings and delay margin improvement.
• While broader adoption of professional grade AI tools across legal and tax work could expand addressable markets over several years, government budget pressures, recent federal contract downgrades and sales reorganization issues in Corporates highlight that macro and operational bumps may intermittently drag on revenue and free cash flow.

Assumptions

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

• The bearish analysts are assuming Thomson Reuters's revenue will grow by 8.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 23.8% today to 23.7% in 3 years time.
• The bearish analysts expect earnings to reach $2.3 billion (and earnings per share of $5.05) by about February 2029, up from $1.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.2x on those 2029 earnings, up from 27.8x today. This future PE is greater than the current PE for the US Professional Services industry at 19.4x.
• The bearish analysts expect the number of shares outstanding to decline by 1.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Federal efficiency programs have already led to contract downgrades and cancellations in the government business, and continued reprioritization of U.S. public sector budgets could further restrict spending on legal, tax and risk tools, putting pressure on revenue growth and potentially slowing free cash flow.
• The corporate segment is working through self-inflicted sales reorganization issues and softer bookings. If cross selling does not pick up as planned or sales execution continues to lag, the company may fall short of its 9% to 11% organic growth ambitions in corporates, which would weigh on total revenue and operating leverage.
• AI assistants have attracted new competitors into what management describes as a greenfield opportunity. If rivals gain ground on CoCounsel or compress pricing in this area, the company may capture a smaller share of AI related spending than expected, which could limit revenue and dilute margins relative to management’s expectations.
• The business is investing more than US$200m annually in AI and expects margin expansion supported by automation and operating leverage. If internal AI projects and automation efforts fail to deliver the planned efficiency gains, adjusted EBITDA margins and free cash flow in 2026 and beyond could be weaker than the current framework assumes.

Valuation

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

• The assumed bearish price target for Thomson Reuters is CA$191.52, which represents up to two standard deviations below the consensus price target of CA$247.14. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$287.13, and the most bearish reporting a price target of just CA$191.52.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $9.5 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 32.2x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of CA$149.0, the analyst price target of CA$191.52 is 22.2% 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.