2023-06-19 21:55:11 ET
Summary
- I reiterate a hold rating due to ongoing macroeconomic headwinds, lowered FY23 guidance, and difficulties with major clients.
- Despite short-term challenges, the long-term bull case for TaskUs is supported by the company's investments in AI and positioning to leverage AI-driven market trends.
- I expect the stock to remain rangebound in the near term due to current uncertainties and the unclear path to strong growth.
Investment thesis
I retain my recommendation for a hold rating given the lack of visible catalyst and the headwinds faced TaskUs ( TASK ), despite the better than expected 1Q23 results. Due to ongoing macro headwinds and difficulties with its largest clients, management has lowered its FY23 guidance. The revised guidance's underlying assumptions should be noted, as they imply sequential growth in 2H23 and positive growth in 4Q23. I think the cut has reduced the risk of this guidance, but further macroeconomic deterioration could still cause problems, especially with 2H23. That said, the long-term bull case for the company and the stock is undoubtedly aided by management's efforts to position TASK to leverage the generation AI secular tailwind, though it is difficult to quantify the full extent of this impact at present. Since the cut in guidance has clouded the road back to strong double-digit growth (the key catalyst that I believed investors are paying attention to), I anticipate the stock will continue to be rangebound around its current level.
Headwinds
TASK has obviously continued to feel the effects of the weak macroeconomic environment. Management cut guidance primarily due to a significant contract loss from a major US client that serves corporate customers. A major social media client also reduced their demand. As things stand in the business world right now, I don't see TASK being able to avoid what is likely to be a rough patch. The macroeconomic environment may continue to deteriorate, so this is a cause for concern. While I agree that reducing guidance was the correct move, I do not think that doing so was sufficient to remove all risk for FY23. In my opinion, management made a mistake by basing their FY23 forecast on sequential growth in 2H23, given the current level of uncertainty. If 2Q23 performance is lower than expected, I anticipate another guidance cut, which would add pressure to the stock.
AI
While I do not have high hopes for the stock in the short term, I do think there is room for a long-term bull case as TASK increases its investments in AI. Keep in mind that TASK business is built on the principle of return on labor, making them especially well-suited to taking advantage of technological advances that enable their workers to accomplish more in the same amount of time. The goal of these efforts has always been to help TASK workers save time and effort by automating routine tasks by building custom tools on top of client workflows. Employees were able to spend more time interacting with clients' customers as a result of these automation investments. Generative AI now even helps with that part of the equation, by making intuitive response suggestions. Not only does AI help with improving external engagements, it also helps with internal team members engagement with databases. I expect it to be a lot easier for team members to search for details within historical transcripts and generate modules/programs for repetitive products that have more versatility (like a training program). All in, these should help with improve profit per employee in the long run.
However, there is a potential risk that AI could diminish the unique value proposition of TASK, as businesses now have the ability to utilize AI technologies to handle these tasks internally. Conversely, it can be argued that AI tools will actually propel TASK forward along the value chain by creating a demand for specialized outsourced labor to manage these AI programs. Consequently, TASK would be able to command higher rates compared to average call centers, since expertise in this field is scarce. Moreover, in addition to increasing the effective ARPU, TASK can implement new pricing strategies, such as utilization-based models (based on the number of AI instances), to ensure scalability with the growth of its customer base. Furthermore, TASK has introduced its own cutting-edge AI solution called TaskGPT, which is built on top of its proprietary Gen-AI technology. This solution can be seamlessly integrated into clients' CRM systems to automatically generate responses based on client data (which requires the expertise of specialized individuals to effectively manage it).
Conclusion
I maintain my recommendation for a hold rating on the stock due to the lack of visible catalysts and the challenges faced by the business, despite better-than-expected 1Q23 results. The revised FY23 guidance reflects ongoing macroeconomic headwinds and difficulties with major clients. While the guidance cut reduces some risks, further macroeconomic deterioration could still pose problems, particularly in the second half of 2023. However, management's efforts to position TASK to leverage the AI-driven market trends provide a long-term bullish case for the company and its stock. Overall, considering the current uncertainties and the clouded road to strong growth, I anticipate the stock will remain rangebound in the near term.
For further details see:
TaskUs: No Near-Term Catalyst To Drive Stock Up