Heightened Geopolitical Tensions Will Drive Data Sovereignty Amid Cloud Risks

Key Takeaways

• OVHcloud's focus on data sovereignty and strategic autonomy could capture growth due to increased demand for secure data solutions amid geopolitical tensions.
  
• Innovation with new products like the Bare Metal Pod and public cloud enhancements could drive higher revenue per customer and support earnings growth.
  
• OVHcloud's strong revenue growth, strategic product rollouts, and solid financial positioning suggest sustained profitability and potential future revenue growth amid shifting geopolitical demands.

Catalysts

Provides public and private cloud, shared hosting, and dedicated server products and solutions worldwide.

• OVHcloud's commitment to data sovereignty and strategic autonomy positions it to capture growth opportunities as geopolitical tensions increase demand for secure and local data solutions, potentially driving future revenue growth.
  
• The continued development of Public Cloud offerings, including enhancements in artificial intelligence solutions and new product rollouts in their Availability Zones, could support future revenue growth by meeting growing customer demands.
  
• OVHcloud's investment in setting up infrastructure, like their upcoming data center in Milan and expansion into new Local Zones, implies plans for future growth, suggesting potential revenue expansion as these come online.
  
• The shift towards longer-term customer engagements through the success of their Savings Plan offers can enhance predictability and stability in revenues, potentially supporting future margin and earnings growth.
  
• The introduction of new products such as the ultra-secure Bare Metal Pod signals an ongoing innovation strategy, which could lead to higher ARPAC (Average Revenue Per Active Customer) and subsequently bolster earnings and margins.

OVH Groupe Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming OVH Groupe's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.1% today to 5.6% in 3 years time.
• Analysts expect earnings to reach €78.6 million (and earnings per share of €0.27) by about July 2029, up from -€900.0 thousand today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €168.7 million in earnings, and the most bearish expecting €43.7 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 27.2x on those 2029 earnings, up from -2398.1x today. This future PE is greater than the current PE for the FR IT industry at 14.6x.
• Analysts expect the number of shares outstanding to decline by 1.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.68%, as per the Simply Wall St company report.

Risks

• OVHcloud experienced a solid revenue growth of 10.2% like-for-like, fueled by continued demand for Public Cloud and data sovereignty offers, suggesting that their revenue might remain strong.
  
• The company achieved an adjusted EBITDA margin of 40%, demonstrating strong operating leverage, which could sustain their profit margins.
  
• Successful refinancing with a €500 million bond and a €450 million green loan suggests a stable financial position, which may secure long-term earnings.
  
• OVHcloud continues to strengthen its market position by rolling out new Public Cloud and AI products, potentially leading to increased revenues from these innovative offerings.
  
• Demand for data sovereignty and strategic autonomy solutions positions OVHcloud well in a shifting geopolitical environment, offering potential for future revenue growth.

Valuation

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

• The analysts have a consensus price target of €11.33 for OVH Groupe 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 €19.0, and the most bearish reporting a price target of just €6.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €1.4 billion, earnings will come to €78.6 million, and it would be trading on a PE ratio of 27.2x, assuming you use a discount rate of 10.7%.
• Given the current share price of €14.35, the analyst price target of €11.33 is 26.6% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• 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.