Generative AI Research Will Expand Opportunities Amid Challenges

Key Takeaways

• Growing focus on AI-driven research, digital transformation, and new frameworks drives stronger client engagement, subscription growth, and pricing power.
  
• Greater government contract wins, operational improvements, and longer client contracts support revenue diversification, stability, and improved future profit outlook.
  
• Sustained revenue declines, weaker client retention, sales challenges, and cost-cutting measures highlight significant operational pressures and uncertain prospects for future growth and profitability.

Catalysts

Operates as an independent research and advisory company in the United States, Europe, the United Kingdom, Canada, Asia Pacific, and internationally.

• Accelerating adoption of generative AI research tools (Izola) and deeper coverage of AI and digital transformation topics positions Forrester as a leading adviser to clients navigating tech disruption, supporting future growth in subscription revenue and client retention.
  
• Increasing complexity in the technology landscape and heightened executive focus on customer experience are driving greater demand for Forrester's new research constructs and frameworks (like Total Experience Score), potentially enabling contract value expansion, higher client stickiness, and improved pricing power.
  
• Expanding success in government contracts and a growing sales pipeline (with 15% QoQ increase) signal new end-market opportunities and diversification, which may drive higher topline growth and revenue stability in future periods.
  
• Increased penetration of multiyear contracts (up to 72% of contract value, with growth in 3-year deals) enhances revenue visibility and reduces churn risk, likely leading to more stable cash flows and better forward earnings predictability.
  
• Strategic operational improvements-including more effective sales management, faster hiring, and better sales conversion processes-should support higher sales productivity, improved retention, and margin recovery over the medium term.

Forrester Research Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Forrester Research's revenue will decrease by 6.4% annually over the next 3 years.
• Analysts are not forecasting that Forrester Research will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Forrester Research's profit margin will increase from -13.7% to the average US Professional Services industry of 7.3% in 3 years.
• If Forrester Research's profit margin were to converge on the industry average, you could expect earnings to reach $23.6 million (and earnings per share of $1.16) by about June 2029, up from -$53.9 million today.
• 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 6.6x on those 2029 earnings, up from -2.5x today. This future PE is lower than the current PE for the US Professional Services industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 1.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.19%, as per the Simply Wall St company report.

Risks

• Persistent revenue declines in all business segments-particularly an 8% overall revenue drop year-over-year and further mid-single
• to double-digit percentage declines expected in research, consulting, and events-signal sustained top-line pressure and reduced earnings potential.
  
• Decreasing contract value (CV) and wallet retention (CV down 7%, wallet retention down 1%) reflect ongoing client budget constraints and lower enrichment, suggesting macroeconomic pressures are causing clients to scrutinize or reduce spend on external research, which threatens both revenue and net margins.
  
• Challenges in the events business, including a 23% year-over-year revenue decline and continued sponsorship headwinds despite increased attendee satisfaction, indicate Forrester may struggle against heightened industry competition for sponsorship and relevance, potentially limiting revenue recovery.
  
• The slow pace of sales pipeline conversion, with management highlighting insufficient conversion rates and deals stagnating in the pipeline, raises concerns over sales execution and effectiveness, which may stall growth and impact future earnings even if the sales pipeline itself is healthy.
  
• Reliance on performance management and headcount reductions (operating expenses down 6% driven by a 12% decrease in headcount) to protect margins could impair capacity for innovation or limit ability to scale, potentially constraining long-term growth and net margin improvement if market conditions do not recover.

Valuation

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

• The analysts have a consensus price target of $6.0 for Forrester Research based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $321.9 million, earnings will come to $23.6 million, and it would be trading on a PE ratio of 6.6x, assuming you use a discount rate of 8.2%.
• Given the current share price of $7.0, the analyst price target of $6.0 is 16.7% lower.
• 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.