Cloud Migration And AI Retailing Will Reshape Long Term Travel Technology Economics

Catalysts

About Amadeus IT Group

Amadeus IT Group is a global travel technology provider that supplies mission critical software and payment solutions to airlines, hotels, airports, travel sellers and other travel providers.

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

• Airlines and hotels are shifting toward richer retailing and trip based offers. Amadeus Nevio, Navitaire Stratos and the Hospitality Platform are positioned at the center of this change, which can support higher revenue per passenger boarded and per hotel transaction and feed through to group revenue and adjusted EBIT.
• The full migration to public cloud, together with long running use of AI and large scale machine learning inference, is expected to let Amadeus run more workloads at scale while holding down unit infrastructure needs. This can support EBIT margin and free cash flow conversion.
• Growing adoption of AI driven products such as dynamic pricing, AI powered search traffic management and agent style tools for travel professionals can increase customer stickiness and upsell potential. This ties directly into revenue growth and higher contribution margins across Air IT and Air Distribution.
• Expanding hotel CRS implementations with large groups like Marriott, Accor and The Ascott Limited, along with broader hospitality and payments solutions, can increase high recurring software and transaction revenue in Hospitality and Other Solutions and support ongoing margin expansion in that segment.
• The build out of payments through Outpayce, Mastercard scheme membership and UnionPay acceptance, together with expanded NDC airline agreements and new travel seller contracts, broadens Amadeus’ role across each booking and payment flow. This can lift revenue per booking and support adjusted EPS growth.

Assumptions

This narrative explores a more optimistic perspective on Amadeus IT Group 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 Amadeus IT Group's revenue will grow by 9.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 20.5% today to 23.8% in 3 years time.
• The bullish analysts expect earnings to reach €2.0 billion (and earnings per share of €4.28) by about March 2029, up from €1.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.7 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 22.8x on those 2029 earnings, up from 16.5x today. This future PE is greater than the current PE for the GB Hospitality industry at 10.8x.
• The bullish analysts expect the number of shares outstanding to decline by 2.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.25%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Airlines and hotels might use cheaper AI coding tools to build more of their own software instead of buying additional Amadeus modules. This could limit adoption of Nevio and other higher value products over time and cap revenue per passenger boarded and professional services revenue growth.
• If agent style AI assistants or other new intermediaries end up owning the customer interface in travel and plug into multiple back end providers, Amadeus’ role as the orchestration layer could be diluted. This may pressure pricing power across Air IT Solutions and Air Distribution and weigh on EBIT margin.
• The long term move to public cloud and heavy use of AI inference could keep infrastructure and cloud costs structurally high or rising faster than expected. Even with solid transaction growth, adjusted EBIT margin and free cash flow conversion might struggle to expand in line with the bullish scenario.
• High and sustained R&D and capital expenditure at around low double digit levels of revenue, combined with large scale cloud partnerships and acquisitions like Skylink, may not always translate into matching revenue gains. This could compress net margins and limit growth in adjusted diluted EPS.
• Industry wide changes in air traffic patterns, booking channels or NDC adoption could shift volumes toward content or models that carry lower revenue per booking for Amadeus over time. This would directly affect group revenue growth and segment contribution margins, particularly in Air Distribution and Hospitality and Other Solutions.

Valuation

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

• The assumed bullish price target for Amadeus IT Group is €87.0, which represents up to two standard deviations above the consensus price target of €72.47. This valuation is based on what can be assumed as the expectations of Amadeus IT Group'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 €87.0, and the most bearish reporting a price target of just €50.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €8.4 billion, earnings will come to €2.0 billion, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of €51.04, the analyst price target of €87.0 is 41.3% 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.