The valuation of European Software and IT Services sub-industry is trading almost at a record high level now, driven by the recovery of earnings post-Covid-19, resiliency of earnings, and an accelerated digital transformation trend.
Covid-19 has accelerated the cloud and digital transformation trend in businesses, but our analysis shows that this does not necessarily translate into meaningful increments to the overall IT spending.
Our reverse-DCF analyses show that the implied long-term growth assumptions embedded in Hexagon and Temenos may be over-optimistic. The remaining companies’ (except Atos) implied terminal growth rates are around 3%-4%, which are reasonable in our view.
In the long run, we believe the market will give valuation premiums to companies with high recurring revenues.
