2023-12-20 07:11:53 ET
Summary
- TaskUs is positioned as a strategic player in the technology sector, benefiting from the inevitable recovery in the sector.
- The stock is currently undervalued compared to peers, presenting an opportunity for long-term investors who are able to see off near-term volatility.
- Multiple growth catalysts, including recent client wins in the AI space and the potential for acquisition, contribute to the optimistic outlook for TaskUs.
Investment Thesis
TaskUs (TASK) stands out as a strategic 'picks and shovels' play in the burgeoning technology sector, primarily servicing an array of tech clients. This positioning grants TaskUs a unique leverage point, as the company benefits directly from the growth and dynamism in this space, especially after the slump it has experienced in the recent past. During the COVID-19 pandemic, TaskUs demonstrated remarkable growth, mirroring the tech sector's robust performance during this period. Although the recent recessionary headwinds have tempered its growth trajectory, there's an optimistic outlook for the sector's revival, which is likely to have a cascading positive effect on TaskUs.
From an investment standpoint, TaskUs's stock currently appears undervalued and is looking like an opportune investment for long horizon investors who want to benefit from the tech sector's recovery. This investment does require a willingness to look past the near-term turbulence and hold this stock for the medium to long term however in our experience, these types of investments are usually the ones that generate outsized returns. We see multiple growth catalysts including recent client wins in the AI space, market recovery for large tech clients which will ease their spending budgets in 2024, and the potential for this company to be acquired in the future by a larger player amid consolidation in the BPO services space (co-founders still own a large stake in the company and will likely look to cash out in the future). We see 60-80% upside from today's price levels.
Company Overview
TaskUs is an emerging player in the Customer Experience ((CX)) and digital service space. Initially owned as a portfolio company of Blackstone (BX), the company went public in mid-2021 at the height of the tech boom (share price went from $23 at IPO to >$80 in a few months!). The company has 47,000 employees across 13 countries
The company operates across 3 service lines:
Digital Customer Experience
Centered around enhancing the interactions between businesses and their customers. This service includes:
- Customer Support : Providing end-to-end customer service solutions, including inbound and outbound communication, issue resolution, and customer feedback management.
- Technical Support : Offering technical assistance for a range of products and services, ensuring clients' customers receive expert help and guidance.
- Omnichannel Solutions : Integrating various communication channels such as email, chat, social media, and voice to deliver a seamless and consistent customer experience.
Trust and Safety
Dedicated to ensuring the integrity and security of online platforms and user experiences. It includes:
- Content Moderation : Monitoring and managing user-generated content across platforms to ensure it adheres to community guidelines and legal standards.
- Fraud Prevention : Identifying and mitigating fraudulent activities to protect both the business and its customers.
- Data Protection and Privacy : Ensuring compliance with data protection regulations and maintaining user privacy.
AI Services
Focused on annotating vast amounts of data for the development of AI algorithms. This service line encompasses:
- AI-Enabled Customer Support : Integrating AI tools to provide smarter and more efficient customer support solutions.
- Machine Learning and Data Analytics : Utilizing advanced analytics to glean insights from large datasets, aiding in decision-making and strategy development.
- Automation and Process Improvement : Implementing AI-driven automation to streamline processes, reduce manual labor, and increase efficiency.
The chart below shows TASK's revenue mix by each service line
Key clients include the likes of Meta (META), DoorDash (DASH), Uber (UBER), Zoom (ZM), Netflix (NFLX) and more recently "the world’s leading LLM developer" (likely OpenAI).
Recent Performance
Between 2019 and 2022, the company grew its revenue (organically) by 40% CAGR. This was phenomenal growth which explains why the stock price shot up after the IPO. In 2023 however, along with the broader market, growth stalled and revenues experienced a slight decline (~4%). The stock price plummeted as a result, falling below $8 at one point, and eventually recovering slightly to ~$12.5. The company's margin profile is still very impressive generating >23% EBITDA margins.
We believe the recent financial performance and stock price deterioration have opened a window for long-term investors to jump in. The overall macro environment had a significant impact on clients such as Meta, Zoom, Coinbase (COIN), etc. These clients make up a significant portion of the company's revenue and hence in TASK's latest earnings, their top 20 clients declined by 7% while outside this group, clients grew by 8%. Note that TASK's top 2 clients (likely Meta and Doordash) make up ~30% of revenue while the top 10 comprise ~60%. As we will discuss in the growth catalyst section below, the recovery in some of these names along with TASK's ability to win new clients organically bodes well for the company.
Growth Catalysts
Recovery in Tech Clients' Outlook
- Tech Sector Revival : The recent surge in the stock prices of top tech firms, including Meta and DoorDash, TaskUs's largest clients, signals a potential increase in spending in the upcoming year. Meta's transition from a " year of efficiency " to a more growth-oriented outlook, and DoorDash's stock price increase of 50%, are indicative of a broader recovery in the tech sector. This resurgence is likely to result in expanded budgets and increased demand for BPO services, benefitting TaskUs.
- Meta's Operational Shift : As Meta moves beyond its efficiency-focused phase, it's likely to reinvest in areas that had previously seen cost-cutting measures, increasing its engagement with service providers like TaskUs. Given Meta's profile, they likely buy all 3 services from TaskUs which means it would be challenging for them to transition away from TaskUs.
New Client Wins
- Recent Success : TaskUs's recent acquisition of new clients, such as OpenAI, is a testament to its ability to attract high-profile tech companies. Importantly, OpenAI's engagement across all three of TaskUs's service lines (Digital Customer Experience, Trust and Safety, AI Services) enhances client stickiness and deepens the business relationship. Given the growth being experienced by OpenAI, TaskUs stands to benefit immensely through its relationship.
- Reduced Client Concentration Risk : TaskUs’s success in expanding its client base beyond the top 20 clients is a strategic move that mitigates the risk associated with client concentration. This diversification strengthens TaskUs's revenue base and positions it for more stable, long-term growth.
Generative AI Opportunity
- AI Services Expansion : The burgeoning field of generative AI presents substantial opportunities for TaskUs. As generative AI continues to evolve, the demand for niche, annotated data crucial for commercializing AI use cases is expected to rise significantly. One criticism we have heard about these services is "If TaskUs is annotating data used to train AI models, these models will eventually become sophisticated enough that annotation services will no longer be required". While on the face of it, this view may seem valid, anyone with deeper knowledge of how AI models are trained can easily show why this argument isn't appropriate. According to McKinsey
AI techniques require models to be retrained to match potential changing conditions, so the training data must be refreshed frequently. In one-third of the cases, the model needs to be refreshed at least monthly, and almost one in four cases require a daily refresh; this is especially the case in marketing and sales and in supply-chain management and manufacturing.
- Trust and Safety in AI : The growing scrutiny around generative AI enhances the importance of TaskUs's Trust and Safety services. Ensuring the ethical and safe use of AI technologies is increasingly critical, positioning TaskUs as an essential partner in this rapidly evolving domain. We have already seen numerous examples of AI chatbots not being scrutinized sufficiently and leading to horrendous outputs. Below is a recent example where a car dealership deployed an LLM-based chatbot to assist customers
For further details see:
TaskUs: A Picks And Shovels Play On Tech Sector's Recovery