GDYN - Grid Dynamics Keeps Growing Improving And Is Now Cheap

Summary

• Grid Dynamics has several expansion catalysts that support its growing top line.
• In fact, its revenue derived from the US market continues to grow and is supported by high-paying customers.
• Additionally, the company has made meaningful M&A activity that provides new areas of growth.
• With the recent pivot to positive EBITDA in Q1 2023 outlook, GDYN's valuation has improved, making it an attractive buy candidate.

Grid Dynamics Holdings, Inc. ( GDYN ) is a leading technology services company that provides enterprise-level digital transformation. They serve a number of Fortune 1000 companies and have expertise in big data, artificial intelligence ('AI'), and cloud migrations. GDYN has new partnerships with Amazon Web Services (AWS) and Microsoft Azure . In addition to this, the company continues to demonstrate its growth potential through awards and a growing human resource base, which currently stands at 3,798 employees globally. Another value-adding catalyst is its improving EBITDA outlook, which is projected to be between $10 million and $11 million in Q1'23, representing a potential turnaround from its negative EBITDA as of this writing. This positive catalyst and its attractive valuation make Grid Dynamics an attractive buy candidate.

Company Overview

Despite the labor challenges globally, Grid Dynamics showed resilience with its growing base, as mentioned earlier. In fact, it has been able to scale up, with a workforce now operating in 13 countries (up from 9 countries a year ago), which may drive top line growth and improved operating efficiency in the future.

Another key growth driver is its material partnership, as quoted below.

Partnership, partnerships continue to be an important part of our growth and has become a significant contributor to lead generation. During the quarter, we made progress with our Tier 1 partnership players with more competitiveness and certifications. With Amazon AWS, we're now their advanced consulting partner and on track of becoming a premier partner later this year. Additionally, we achieved the service delivery designation for Amazon EKS and AWS cloud migration.

With Google, we're one of the very few premier partners with a seven specialization and 40 plus expertise related to Google Cloud. We continue to be primary partner for implementation of discover artificial intelligence for retail, Google solution offering for Product Search and recommendations. With Microsoft Azure we will launch new starter kits to accelerate Enterprise migration.

And finally, at Commerce Tools, our premier partnership continues to grow around composable commerce solutions that enable global brands to engage with their customers. Q4'22 Earnings Call Transcript

These two catalysts could set GDYN one step ahead of the competition, which makes it an even more interesting company.

An additional catalyst that makes GDYN extra interesting is its attractive M&A activity. In fact, the company recently acquired Mutual Mobile . Mutual Mobile's deep understanding of mobile or flexible platforms, IoT, and virtual reality environments, positions the company to better grasp big opportunities in today's digital transformation trend. Additionally, as quoted below, vertical expansion in a high-growth industry like the automotive sector results in a more diverse product portfolio.

The company has focused on healthcare, automotive and financial services industry. It's also added 175 kind of skilled talent to our operations. We are already working on the cross selling opportunities and expect to leverage each other customer base. Source: Q4'22 Earnings Call Transcript

Indeed, it comes as no surprise that we see a growing top line forecast, as shown in the image below.

This FY'22, GDYN generated $310.5 million in revenue, up from $211.3 million over a year ago. The growth of the company's customer base has been highlighted by an increase in annualized revenue to over $1 million from 48 customers, up from 34 customers a year ago.

Finally, GDYN's portfolio is in high demand, and this trend is likely to continue for the foreseeable future. It is well-positioned to capitalize on this trend as a growing number of businesses seek to enhance their digital capabilities.

However, this aggressive expansion move put GDYN's profitability under pressure as shown in its operating loss amounting to $21.0 million. This loss is primarily attributable to uncontrolled general and administrative expenses, including non-recurring reorganization costs related to the Russian-Ukrainian War. Excluding these factors as shown in the image below, we can see continued operating efficiency.

Trading Near Support

Looking at the chart above, GDYN seems to be consolidating inside the range of $10 and $14. Looking at its Simple Moving Averages (“SMA”) shows that the 50-day SMA is above the 200-day SMA, which implies bullish momentum. The MACD also supports this sentiment, as shown in the chart above. One indicator to watch for is a 20-day SMA breakout, which could bring more bulls into the stock. As of now, GDYN is just consolidating near support and slowly accumulating at this zone provides a good risk/reward.

Cheaper Than Before

After experiencing a market sell-off earlier this year, the current valuation of the company has become attractive. Today, GDYN trades at a forward (Non-GAAP) P/E of 25.31x only as compared to its 5 year forward P/E average of 81.02x. Another interesting metric to see is its discounted forward EV/EBITDA of 10.83x compared to its 28.25x 5-year forward EV/EBITDA average. Additionally, this is also reassuring to see a continued recovery from its negative trailing EV/EBITDA as of today. Considering positive catalysts mentioned earlier, I believe GDYN is cheap and attractive as of this writing.

Conclusive Thoughts

Despite the fact that 86% of GDYN's human resources are located outside the US, US customers account for 82% of the company's total revenue in FY'22. However, GDYN emphasizes customer concentration risk, as its 10 leading customers account for 57.7% of its total revenue. This could have a negative impact on its future top line, particularly in light of the prolonged recession, which could change its customers' demand.

On the other hand, while the pandemic and inflationary pressures continue to impact the economy, there is currently no data to support a slowdown in digital transformation spending. Despite these challenges, businesses are still investing in digital technologies to stay competitive. In fact, digital transformation is expected to continue to grow, providing opportunities for GDYN to capitalize on.

GDYN remains fundamentally liquid behind its temporary disruption in its GAAP figures. As a matter of fact, it boasted an improving current ratio of 8.35x with no material total debt outstanding. Its cash flow from operations keeps improving to $31.7 million.

To sum it up, GDYN's improving profitability and expansion catalyst make the company an attractive buy in today's bearish market in my view.

Thanks for reading and good luck!

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