GLOB - Globant: Riding The Digital Transformation Wave

2023-03-08 03:35:47 ET

Summary

• Globant is a lesser-known compounder that performed extremely well in the past decade.
• The ongoing trend of digital transformation should continue to be a strong growth driver.
• Its latest earnings result showed excellent growth on both the top and the bottom line, though guidance was weak.
• The current valuation is elevated compared to peers.
• I rate the company as a hold.

Investment Thesis

Globant ( GLOB ) has been a fabulous compounder in the last decade, with shares up over 1,400% since 2014. However, the company has dropped over 50% from its all-time high in 2021 as macro headwinds hit. I believe the pullback offers a bottom-fishing opportunity for long-term investors. The pace of digital transformation has been accelerating in the past few years and should continue to provide strong tailwinds. The company latest earnings reported impressive revenue growth despite facing a tough backdrop. Despite the significant drop, its valuation is still elevated with multiples slightly above peers. I think the company is close to fully valued and I rate it as a hold.

Huge Market Opportunity

Globant is a Luxembourg-based digital consulting company founded back in 2003. The company helps customers all around the globe innovate and grow through different digital transformation services. For example, it can help facilitate the shift to Cloud or improve the payment system through the latest fintech solutions. It provides a full end-to-end service from strategy to execution. The company's existing customers include blue-chip companies such as Coca-Cola ( KO ), American Express ( AXP ), and Unilever ( UL ).

Globant has performed extremely well in the past decade thanks to digital transformation, as it fueled the adoption of new technologies and increased the demand for the company's services. Despite the recent progress, many technologies such as fintech and cloud are still in their early innings which provide huge market opportunities. According to Vantage Market Research , the TAM (total addressable market) of fintech is expected to grow from $112.5 billion in 2021 to $332.5 billion in 2028, representing a strong CAGR (compounded annual growth rate) of 19.8%. The adoption rate of these technologies continues to increase as they are able to vastly increase operation efficiency and reduce costs.

Meanwhile, we are also seeing new technologies such as generative AI and Blockchain emerge, which could further expand Globant's market opportunity by nearly $80 billion. I believe digital transformation will continue to be a strong growth driver as the pace of technological change accelerates.

Martin Migoya, CEO, on the opportunity of AI :

In 2023, we see the AI revolution accelerating and shaping organizations as they adapt to new landscapes. With the recent expansion of foundation models, and generative AI, it has become clear that we have a massive new opportunity for us and for our clients. We are very optimistic for long-term growth because the demand for AI is growing fast. Spending is expected to reach $300 billion by 2026. It is quickly becoming an essential part of software. Every digital product will have an AI layer. We believe that large language models can simplify software development creation, moving our industry forward.

Q4 Earnings

Globant recently released its fourth-quarter earnings and the results continue to be solid, though guidance was a bit weak. The company has recorded a revenue CAGR of 31.5% since going public which is extremely impressive.

Total revenue for the quarter was $490.7 million , up 29.2% YoY (year over year) compared to $379.8 million. Revenue from North America contributed 61.7% of total revenue while Latin America accounted for 22.7%. Revenue growth is mainly driven by the increase in high-value customers. The number of customers that generates over $1 million in annual revenue increased by 40% from 185 to 259. Gross profit increased 27.2% YoY from $144.3 million to $183.5 million, while gross profit margin dipped 60 basis points to 37.4%.

The bottom line was also excellent as the pace of spending slowed. Despite strong revenue growth, SG&A (sales, general, and administrative) expenses only increased 24.3% YoY from $99.6 million to $183.5 million. This resulted in net income soaring 55% YoY from $96.4 million to $149.5 million. Net income margin also expanded 100 basis points from 7.4% to 8.4%. Diluted EPS was $3.47 compared to $2.28, up 52.2% YoY. The company also initiated guidance for FY23 which was surprisingly underwhelming. Revenue is expected to be at least $2.1 billion, representing a 16% growth YoY. EPS is expected to be at least $5.7, or a growth of 12.2% YoY.

Investors Takeaway

Globant has been benefiting from the digital transformation wave and the trend should continue as new technologies like generative AI emerges. The company's fourth-quarter results are strong but the guidance makes me cautious. Maybe the management team is trying to be conservative but it indicates a meaningful step down in growth from 37% to 16%.

Despite the drop in share price, Globant's current valuation is still elevated. It is trading at a PE ratio of 49.7x which is above other digital consulting peers like EPAM Systems ( EPAM ) and Endava ( DAVA ), which are trading at a PE ratio of 43.8x and 40.1x and respectively. While I believe the company should do well in the long term, the guidance and valuation will likely limit its near-term upside. Therefore I rate the company as a hold.

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