NSIT - Insight Enterprises: Acquisition Of SADA Can Drive The Growth

2023-12-14 12:55:30 ET

Summary

• Insight Enterprises has acquired SADA, a Google Cloud Partner, to expand its product offerings and attract more customers.
• The company reported a decrease in net sales in Q3 2023, but net income increased YoY.
• NSIT is undervalued and has a potential upside of 23%-27% due to positive industry demand and the recent acquisition of SADA.

Investment Thesis

Insight Enterprises ( NSIT ) deals in providing digital solutions to businesses. The trends in digital transformation have elevated the demand for technology products. The company has recently acquired SADA which can help it increase its product offerings and attract additional customers by increasing its profit margins in my view.

About NSIT

NSIT provides solutions to its clients to enhance their digital presence. It provides solutions integrators that enables end-to-end transformation through an extensive portfolio of solutions. The company conducts its business in three operating segments: North America, EMEA, and APAC, which are primarily categorized as per their respective geographies.

It mainly provides software and services, comprising cloud solutions and IT hardware, to its clients in North America and some countries in EMEA and APAC. It offers software-related services and cloud solutions to the remainder part of these countries. The North American business contributed approximately 81% to the company’s net sales in 2022. Europe, the Middle East, and Africa represented about 17%, and the Asia-Pacific region contributed approximately 2% to the total net sales. The company’s area of solutions primarily includes Modern platforms/ infrastructure, Cybersecurity, and, Data and Artificial Intelligence.

Modern infrastructure mainly modernizes networking solutions and multi-cloud to drive business growth. Cybersecurity helps in mitigating risk and securing business assets. Artificial Intelligence is leveraged to transform the client's business and offer them improved user experiences. It also provides managed services which comprise technical support for comprehensive management, monitoring, and reporting. The consulting services include security and disaster recovery, IT optimization, and automation. It also consists of Hardware, Software, and Lifecycle services in its portfolio that facilitate clients to optimize their returns.

Acquisition of SADA

Artificial Intelligence has been a prominent factor that has transformed businesses rapidly. It has become one of the essential spending in most industries such as security, finance, healthcare, and transportation. Its scope has widened significantly after it was proven to improve business efficiency significantly. These factors have led to growing investments in AI by leading firms globally. This technology is experiencing robust growth. According to Gartner, enterprise IT spending is anticipated to reach $4 trillion by 2026. This high forecast reflects that the industry has long-term growth prospects and also creates huge potential opportunities for the participants. Identifying these scenarios, the company has recently acquired SADA which is a Google Cloud Partner. It is one of the market-leading firms that deals in technical and consulting services. It has 10 Google Cloud specializations, comprising infrastructure, security, cloud migration, application development, data analytics, machine learning, and location intelligence.

This acquisition will add 850 professionals, dedicated to the Google Cloud System. This broadening of its portfolio can strengthen Insight's current position as a provider of cloud, data, artificial intelligence, cybersecurity, and intelligent edge solutions and services across the world's top hyperscale ecosystems: Microsoft (MSFT) Azure, Google Cloud, and Amazon (AMZN) Web Services ((AWS)). I believe this expansion can increase the company’s scale and expertise, which can further enhance its cloud offerings and help it to attract more clients and increase its profit margins by capturing additional market share. As per my analysis, this can also highly benefit the company in gaining a competitive edge by creating a strong market presence as it is expanding its offerings significantly with the help of SADA, which also brings a great service reputation to the company. I think the firm has long-term upside and can sustain its growth in the coming quarters as a result of strong industry dynamics and expansion activities which helps it to penetrate deeper into the markets.

Dee Burger, the President of Insight North America, expressed that through the acquisition, they are making substantial progress toward becoming the foremost Solutions Integrator. He emphasized their focus on pivotal market segments such as cloud, data, AI, cybersecurity, and edge. Additionally, he highlighted the inclusion of SADA's Google Cloud clients in their portfolio, accompanied by specialized Google Cloud sales and technical resources.

Financials

The company has reported its quarterly results. It reported net sales of $2.26 billion, down 10.57% compared to $2.53 billion in Q322. This growth was mainly resulted by a decrease in its product revenues by 13%. Net income surged by 5.11% YoY from $57.31 million to $60.14 million. It reported a diluted EPS of $1.62. The Products and Services segment revenues were $1.89 billion, and $0.37 billion, respectively. NSIT reported $0.24 billion in liquidity and adjusted EBITDA stood at $0.12 billion.

The company has performed well in its third quarter as a result of continuing growth in the demand levels. I believe it can sustain its growth in the coming quarters as it has recently acquired SADA, which can help to increase its offerings and attract additional customers by increasing its profitability.

What is the Main Risk Faced by NSIT?

The company mainly acquires its products for resale from manufacturers, publishers, and other distributors. It generally does not have long-term agreements to obtain these products. If there are any disruptions in the availability of these products from the vendors, it can negatively impact the company’s operations and can further contract its profit margins. In addition, the company also receives considerable incentives from its partners which are in the form of early payment discounts, rebates, and purchasing incentives. These incentives help the firm to manage its cost-efficiently. If the company fails to maintain the goals of such programs, it can lead to higher expenses and lower profit margins. Its largest partners with such incentive programs include Dell, Microsoft, Cisco Systems (CSCO), and Lenovo.

Valuation

Digital transformation has induced robust demand for AI and cloud technologies. The industry is highly underdeveloped and has a lot of growth potential as various businesses are leveraging technology to run their operations. To cater to the growing needs, the company has recently acquired SADA, which is a technical services and cloud consultancy firm. I believe this can help NSIT to increase its offerings and capture a larger market share by further enhancing its profit margins. After considering all these factors, I am estimating an EPS of $11.55 for FY2024 which gives the forward P/E ratio of 15.47x. After comparing the forward P/E ratio of 15.47x with the sector median of 23.57x, we can conclude that the company is undervalued. I think the firm can potentially grow in the next year as a result of positive industry demand and its recent acquisition of SADA which can help it to trade above its forward P/E ratio. I estimate that the company might trade at a P/E ratio of 19.77x in 2024, giving the target price of $228.34, which is a 27.71% upside compared to the current share price of $178.79. Reduced sales due to disrupted services from vendors can affect the financial performance of the company during adverse economic conditions. I think in that case, it can contract the profit margins and EPS of the company.

I believe in the bear case scenario of reduced revenues due to the unavailability of products, the EPS of FY2024 might be $11.20, and estimate that the company might trade at a P/E ratio of 19.69x, which gives a target price of $220.52, representing an upside of 23.34%.

Conclusion

The digital revolution has resulted in significant demand for technology products. Cloud technologies and AI are highly leveraged by various businesses to run their operations. Identifying these growth trends, the company has recently acquired SADA which can increase its product offerings and help to attract additional customers by further expanding its profit margins. It has also performed well in quarterly results which indicates the strong industry demand dynamics. However, it is exposed to the risk of disruptions in product availability of products from vendors which can contract its profitability. The stock is currently undervalued, and we can expect a decent growth of 23%-27% from the current price levels as a result of positive industry dynamics and its expansionary activities. After considering all the above factors, I assign a buy rating to NSIT.

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