CAPMF - Globant S.A. Expects Attenuated Growth As AI Opportunities Await

2023-11-02 15:57:16 ET

Summary

• Globant S.A. provides consulting and digital transformation services to companies worldwide.
• The market for digital transformation services is expected to reach $3.95 trillion by 2030 with a CAGR of 23.1%.
• Globant's financial trends show continued revenue growth, but the stock is possibly fully valued at its current price.
• I reiterate my Hold outlook with the potential for upside as clients spend more on new projects and AI-enabled technologies in the coming quarters.

A Quick Take On Globant S.A.

Globant S.A. ( GLOB ) provides a range of consulting and digital transformation services to companies worldwide.

I previously wrote about GLOB with a Hold outlook on lower utilization rates and slower revenue growth expectations.

Given the stock’s apparent full valuation at its current level of around $177.00, I reiterate my previous Hold outlook for Globant S.A. in the near term.

GLOB may have potential upside as customers return to new project spending and demand for AI-related engagements increases over the coming quarters.

Globant Overview And Market

Luxembourg-based Globant S.A. provides various technology and business consulting, digital transformation and related software and services to companies in Europe and internationally.

GLOB is led by co-founder and CEO Martin Migoya, who is also a Director at Endeavor Argentina and co-founder of Vivid Growth.

The firm’s main service offerings include a wide range of digital services for companies in various major industry verticals and at different stages of their digital transformation process.

Globant seeks new customers through its in-house direct sales and marketing efforts, its various Studios that specialize in particular service areas, and through partner referrals.

According to a 2022 market research report by Grand View Research, the market for digital transformation services was an estimated $609 billion in 2021 and is forecast to reach $3.95 trillion by 2030.

This represents a very high forecast CAGR of 23.1% from 2022 to 2030.

The main drivers for this expected growth are the need by organizations of all sizes to improve their IT operations to increase efficiencies and reduce costs.

Also, the chart below shows the U.S. digital transformation market’s historical and projected future growth trajectory by solution:

Major competitive or other industry participants include:

• EPAM

• Slalom

• Accenture

• Deloitte Digital

• McKinsey

• BCG

• Ideo

• Cognizant Technology Solutions

• Capgemini

• Company in-house development efforts.

Globant’s Financial Trends

Total revenue by quarter has continued to rise; Operating income by quarter has grown slightly sequentially:

Gross profit margin by quarter has moved slightly lower recently; Selling and G&A expenses as a percentage of total revenue by quarter have varied somewhat in recent quarters:

Earnings per share (Diluted) have plateaued recently:

(All data in the above charts is GAAP.)

In the past 12 months, GLOB’s stock price has fallen 1.15% vs. that of the SPDR® S&P Software & Services ETF’s ( XSW ) rise of 12.05%:

For balance sheet results, the firm ended the quarter with $270.8 million in cash, equivalents and short-term investments and $0.4 million in total debt, of which $0.3 million was categorized as the current portion due within 12 months.

Valuation And Other Metrics For Globant

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha.)

Below is an estimated DCF (Discounted Cash Flow) analysis of the firm’s projected growth and earnings:

Based on the DCF, the firm’s shares would be valued at approximately $167.31 versus the current price of $177.25, indicating they are potentially currently fully valued.

As a reference, a relevant partial public comparable would be much larger consulting company Capgemini SE (CAPMF):

(Source - Seeking Alpha.)

Note that Net Income Margin is approximately the same for each company, yet Globant’s EV/Sales and EV/EBITDA valuations are more than double Capgemini’s.

Sentiment Analysis

The chart below shows the frequency of various keywords in the most recent earnings conference call:

Analysts asked leadership about the firm’s growth trends and outlook, the performance of key accounts, emerging capabilities and margin outlook.

Management responded that it expects double-digit growth in 2024 based on current trends and that its Disney account activity is stabilizing due to a gradual return to investment in technology and digital transformation.

The firm is seeing project demand in emerging capabilities such as AI, and management expects broader adoption over the coming quarters, subject to client quality testing results.

Leadership also said that margin outlook is a bit lower due to recent foreign exchange movements in Latin America.

Commentary On Globant

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023’s results, management’s prepared remarks highlighted record quarterly revenue and "strong sequential growth into the second half of the year."

The firm sees two major use cases for its AI-enabled capabilities. One is what it calls Augmented Knowledge, with the ability to interact with unstructured data in a conversational way.

The second is what it calls Converse AI, "which allows an end user to interact with a transactional system in a conversational way."

Management noted that IDC recently named the company a leader in AI in its IDC MarketScape for Worldwide Artificial Intelligence Services 2023.

Total revenue for Q2 2023 rose by 15.9% year-over-year, but gross profit margin fell by 1.2% due to FX headwinds in Latin America, as mentioned above.

Management didn’t disclose any client, revenue or employee retention rate metrics.

Selling and G&A expenses as a percentage of revenue slid by 0.4% YoY, and operating income dropped by 1.7%.

The company's financial position is strong, with ample liquidity and negligible debt.

Looking ahead, current top line revenue growth estimates for 2023 expect a 17.4% growth rate over 2022.

If achieved, this would represent a decline in revenue growth rate versus 2022’s growth rate of 27.3% over 2021.

A potential upside catalyst to the stock could include increased client demand for the firm’s AI-related capabilities, but this will likely take several quarters to begin manifesting in the company's financial results.

Given the firm’s apparent full valuation at the current stock price of around $177.00, my outlook for GLOB remains Hold.

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