NICE Stock: A Guaranteed Premium for Profitable Growth (NASDAQ: NICE)

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During his last investor day eventglobal business software provider NICE Ltd (NASDAQ: NICE) presented updated financial targets through fiscal year 2026, with a target of double-digit % growth in revenue (more than 80% from the cloud) and operating margins of more than 30 %. Prospects were largely in line with the industry-wide acceleration of contact center modernization efforts amid post-pandemic digital transformation. Given the clear benefits of cloud contact center technology and the migration of enterprise contact centers to the cloud, I see a clear path to sustainable revenue growth and steady margin expansion in years to come. While NICE shares are trading at a premium c. 17x EBITDA, superior profitability and growth prospects justify the valuation.

CCaaS remains a compelling secular growth opportunity

Driven by strong enterprise traction, international demand and AI capabilities, NICE has seen its leading cloud-based contact center solution gain strength over the past few years. Looking ahead, growth prospects look very favorable – the addressable market opportunity for customer engagement is expected to reach c. $21 billion in fiscal 2026 (up from about $7 billion last year). Key drivers include the accelerated adoption of cloud and next-generation digital solutions, as well as self-service customer engagement becoming more mainstream. Despite the post-pandemic acceleration, we remain in the early stages of the CCaaS (“contact center as a service”) adoption curve. And with less than 10% of contact center agents currently using a true cloud solution globally, I foresee a long streak of growth ahead.

CCaaS market size

NICE Investor Presentation Slides

A key advantage for NICE in CCaaS is the high barriers to entry – other big tech players such as Zoom (ZM) and Amazon (AMZN) have attempted to enter the CCaaS market themselves, but the level of The expertise required to succeed, as well as the required level of investment needed (a minimum of $200-250 million in R&D) prevented them from properly developing a competitive CCaaS product. Although mergers and acquisitions are another way to potentially enter the market, there are not many large-scale assets available for acquisition in the space. As such, I see NICE, a leading CCaaS provider, as the ideal vehicle to gain exposure to CCaaS growth in the medium to long term.

Many advantages for the medium-term financial model

Building on its recent growth milestones (over $1 billion in cloud revenue and over $2 billion in total revenue), NICE reiterated its ambitious mid-term goals with its NICE3D strategic plan. Fiscal 2026 framework shows company left financial targets largely unchanged, reiterating gross margin target of over 70% and double-digit revenue % growth, driven by contribution from cloud over 80%. Somewhat surprisingly, the 30%+ operating margin target (originally introduced in FY19) was also reiterated despite the considerable opportunity for operating leverage as the cloud business continues to develop. Notably, NICE’s recent quarterly results have already shown 29% year-over-year cloud growth thanks to several major deals involving its cloud-native customer experience platform, CXone. And after unlocking nearly 900 basis points over the past three years on the momentum of the cloud business, NICE’s margins are already at c. 28%, highlighting the conservatism embedded in these goals.

Medium term targets

NICE Investor Presentation Slides

Going forward, a key driver of growth and margins will also be the increasing share of companies in the business mix. These customers tend to have higher gross margins than small and medium businesses due to lower usage revenue and higher-margin products, including Workforce Engagement Management (WEM) and automation. NICE has also invested in international expansion, a potentially huge growth opportunity given its limited footprint in around EMEA and APAC. 14% and approx. 5% of turnover, respectively. Scaling the business internationally could unlock operational leverage on cloud infrastructure and go-to-market investments, providing an additional advantage over current mid-term goals. While the growth initiatives outlined are positive, I believe it is equally important that NICE continues with a more balanced approach to growth in these areas (for example, ensuring control over G&A expenditure) in light of the prevailing conditions. stricter liquidity requirements.

A strong financial position enables opportunistic deployment of capital

While recession fears and rate hikes have led to a steep depreciation in unprofitable tech stocks year-to-date, the high-quality nature of NICE’s business stands out. NICE has never had a “growth at all costs” approach, opting instead for a very disciplined balance between growth and profitability. And as NICE continues to prove its medium-term strategy, I think investors will give more credit to the attractive financial model. So far, NICE has maintained a strong financial position, with c. $1.5 billion in cash (including short-term investments) and free cash flow generation of $450-500 million per year. This puts the company in an excellent position to take advantage of accretive capital allocation opportunities for shareholders at a time when venture capital funding is slowing. Future mergers and acquisitions will likely focus on Israel, where NICE sees plenty of opportunities for small, interesting acquisitions. Other capital deployment options include a larger share buyback program – in FQ1 ’22 alone, NICE bought back c. $64 million in equities (vs. ~$73 million for all of 2021) amid continued market weakness.


NICE Q1 2022 results

Final take

NICE’s focus on profitability and strong cash flow generation at this year’s Investor Day was perhaps unsurprising in light of the broader market trends at play. 2026 for double-digit revenue growth and operating margins of over 30% were positive, while the strong balance sheet and consistent cash flow generation through cycles means NICE is well positioned to deal with any downturn in the future. Looking further ahead, NICE’s dominance as a leading player in the attractive CCaaS market also appears to be intact, supported by its prioritization of digital transformation initiatives and the limited number of competitors able to offer similar functionality. in large scale. NICE shares are trading at a c. 17x EV/EBITDA multiple, which I consider justified given its sustainable free cash flow generation and future growth opportunities.


About Barbara J. Ross

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