GLOB - Globant Q4 Results: An Interesting AI Play

Summary

• Globant stock's Q4 results show that growth is decelerating, but the company believes this to be temporary and the result of macroeconomic conditions.
• Globant is well-positioned to benefit from the growth in AI. From using it as an internal tool to increase efficiency, and as part of the solutions offered to customers.
• The valuation is no longer extremely stretched, but given the growth deceleration, we are maintaining our 'Hold' rating.

As we had feared last time we analyzed Globant ( GLOB ), a weakening economy and increasing headwinds would make it harder for the company to sustain its impressive growth rates. As a result the company is increasingly looking at new geographies in an attempt to maintain growth going for as long as possible. The results Globant delivered were not bad, in fact the company continues growing at an impressive rate. In Q4 revenue was $490 million, representing ~29% y/y growth. For the full year 2022, total revenue was $1.8 billion, or ~37% y/y growth. Growth in the year was helped by acquisitions, but organic growth was still an impressive ~32%. Still, the growth deceleration is clear, with Q4 revenue growth lower than growth for 2022 as a whole. Q4 revenue growth was 30.9% y/y in constant currency, with significant inorganic contribution to y/y growth of roughly 6%. Even more concerning, the company is guiding for Q1 of 2023 y/y revenue growth of only ~17%, despite having a ~5% tailwind from recent acquisitions. Globant was very open in admitting they experienced some long closing cycles during the end of 2022 and early 2023. They also said that they are now seeing initial signs of a positive change on those trends, which gives some optimism that maybe growth will recover soon.

We have to give Globant credit for being proactive and looking for new growth opportunities, as growth in some of its more developed regions starts slowing down. In Q4 the EMEA and APAC regions grew strongly at roughly 43% and 110% y/y respectively, while its most important region, North America, only grew ~24% y/y. This shows that the expansion move that Globant made in 2022 in Asia Pacific is paying dividends. The company now has a presence in Australia, Hong Kong, Singapore and the Philippines. It also now has a presence in Denmark with the acquisition of Vertic. This means Globant is now present in 25 countries.

Probably as a result of the hype generated by ChatGPT, there was a lot of time spent during the recent earnings call talking about Globant's AI capabilities. The company believes that most digital product will have an AI layer, and that large language models can simplify software development. From what we understood, Globant has focused most of its AI investments into developing internal AI tools that help accelerate software development. It mentioned its low-code platform GeneXus which is based on large language model technology and can help develop software solutions in record time. This sounded to us very similar to Microsoft's ( MSFT ) ChatGPT copilot tool. Other tools the company mentioned were Augoor, which improves the coding process, and MagnifAI, which speeds up testing. The overall impression we got is that the company sees a lot of opportunity in AI, both in terms of adding AI components to the solutions offered to customers, as well as in using AI to optimize its development processes.

Financials

One thing that sets Globant apart from other high-growth companies that we follow, is that it is solidly profitable. A can be seen in the graph below, the company has had very respectable and stable profit margins for quite some time now.

Adjusted net income for the full year 2022 came in at $217 million, representing a 12.2% adjusted net income margin. Adjusted net income for the fourth quarter was $60 million, representing a 12.3% adjusted net income margin. Adjusted diluted EPS for Q4 was $1.40, a 30.8% increase year over year. Full year 2022 adjusted EPS was $5.08 and represented 35.1% y/y growth.

Growth

While Globant has delivered impressive growth for a long time, we do worry that it is going to get more difficult to maintain these growth rates going forward. Already the company is having to rely on new geographies to sustain its growth rate, as its more developed markets decelerate.

Guidance for Q1 of 2023 was relatively weak, with the company expecting only ~17% y/y growth. Historically the company has had periods of weak growth, and then saw growth recover, so we are giving Globant the benefit of the doubt for the time being.

Balance Sheet

Globant has a solid balance sheet that should allow the company to capitalize on acquisition opportunities if they present themselves. It ended the year with a net cash position, and with cash and short-term investments of ~$340 million. It also has an undrawn credit facility of $350 million. This is complemented by strong free cash flow generation by the company, including generating ~$80 million of free cash flow in Q4.

Guidance

As already mentioned, guidance for Q1 revenue was very weak, with the company expecting revenues of $470 million which represent ~17% y/y growth. This is despite the company having a tailwind of ~5% growth from recent acquisitions. This means the company is expecting Q1 of 2023 to be actually lower than Q4 of 2022. Globant expects Q2 of 2023 to be similar to Q4 of 2022, or slightly higher. The adjusted EPS for Q1 is expected to be at least $1.27.

Management said they are trying to be conservative given the signals they are receiving from clients that point to a moderate start of the year. Their outlook does not assume a recession, nor a strong recovery, and considers a neutral FX outlook. Expectations for the full year 2023 are for revenue of ~$2 billion, or 16% y/y growth. Around 4% of this growth would come from acquisitions made in 2022. The adjusted diluted EPS for 2023 is expected to be ~$5.70.

Valuation

At current prices shares are trading at a forward adjusted diluted EPS multiple of ~30x. If the company can sustain 20%+ revenue and earnings growth for several more years, we believe it can be argued shares are more or less reasonably valued. Most of the post-pandemic multiple expansion has been corrected, and we believe the current valuation multiples to be more appropriate than those seen from late 2020 to early 2022.

Looking forward, analysts expect on average adjusted diluted EPS to reach ~$9 by fiscal year 2025. That would represent a FY25 p/e ratio of only ~19x, and is one of the reasons that we believe that if the company can meet growth expectations then shares are reasonably valued right now.

Risks

The biggest risk we see for Globant investors is growth permanently decelerating. The valuation continues to reflect high growth expectations for the future. This means that shares could fall significantly if growth does not recover, and instead continues to decelerate. This risk is partially mitigated by a strong balance sheet, and valuation multiples that have moderated considerably.

Conclusion

The two main takeaways we have from Globant's recent results are that growth is decelerating, but the company believes this to be temporary, and the result of macro-economic conditions. The other takeaway is that the company is well positioned to benefit from AI, both as an internal tool to increase development efficiency, as well as part of the solutions offered to customers. We believe that given Globant's scale, it will be increasingly difficult to sustain 30%+ growth rates, and we are already seeing the company having to expand to new geographies as its more developed regions decelerate. The valuation is no longer extremely stretched, but given the growth deceleration we are maintaining our 'Hold' rating.

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