2023-10-03 08:52:20 ET
Summary
- TaskUs’ revenue has grown at a CAGR of 34% during the last 4 years, driven by an aggressive go-to-market strategy and a focus on high-growth industries.
- The business is positioned well to continue its strong trajectory, owing to the development of its services suite, expansion globally, and a well-developing brand.
- The concern is that in the near term, economic conditions are weighing heavily, contributing to negative investor sentiment and a decline in financial performance.
- The company’s performance relative to its peers is underwhelming but we believe it is overly exposed cyclically. When considering its upside potential, we believe there is value here.
- TaskUs stock is trading at a <7x EBITDA multiple while being exposed to high-growth clients and developing its own technological capabilities. We consider this a cheap price with risk priced in.
Investment thesis
Our current investment thesis is:
- TaskUs ( TASK ) has incrementally developed strong market expertise and a brand that is synonymous with various growth industries, such as e-commerce and tech. Management has been active with expanding its services to deepen its relationships with clients, while also increasing its revenue generation potential. Although creating tech-enabled services is risky, we believe progress is positive and has the potential to transform its financial performance.
- We consider the industry to also be attractive. Its reliance on human capital is not ideal but we believe this is offset by its industry focus. Tech firms will never seek to take these services in-house and so allows TaskUs to grow alongside them, even if this means being cyclically linked.
- At a <7x EBITDA multiple and a FCF yield of 13%, we believe this is a highly attractive company, with all risks priced in. The near term will be difficult which could mean TaskUs trades flat (and so we have not rated this a STRONG BUY), but we believe this is a good time to start building a position.
Company description
TaskUs is a leading provider of outsourced customer service and business process outsourcing ((BPO)) solutions. Founded in 2008 and headquartered in Santa Monica, California, TaskUs operates globally, with delivery centers in locations such as the United States, the Philippines, Mexico, India, and other countries. The company serves a wide range of clients, including technology, e-commerce, healthcare, and financial services companies.
Share price
TaskUs’ share price has collapsed since the end of 2021, as a change in market conditions has contributed to a deterioration in its financial performance. The wider market has also struggled, trading flat, although it is clear TaskUs has significantly struggled.
Financial analysis
TaskUs financials (Capital IQ)
Presented above are TaskUs's financial results.
Revenue & Commercial Factors
TaskUs’ revenue has grown incredibly well in recent years, with a CAGR of 34% into the LTM period. This growth trajectory has been consistent, although the current macro conditions have contributed to a rapid deceleration.
Business Model
TaskUs offers a comprehensive suite of outsourcing services, including customer support, content moderation, digital marketing, data entry, technical support, and back-office operations. TaskUs’ objective is to help clients streamline their business processes and focus on core competencies. The company primarily targets technology-enabled businesses, many of which lack the expertise to provide these services (and have no desire to develop them). This positions TaskUs extremely well to create a long-term relationship with these businesses, benefiting from their growth trajectory.
Currently, c.84% of its revenue is from these traditional outsourcing services, with a further 16% from AI services that support the broader client-support services provided. Management is investing heavily in its AI services, which have the potential to generate outsized growth and reduce incremental human capital costs with growth.
TaskUs employs a global workforce distributed across multiple locations, including the United States, the Philippines, India, Mexico, and other countries. This allows the company to provide 24/7 support, leverage diverse skill sets, and offer cost-effective labor solutions. Management continues to invest in expanding its global delivery expertise, as this is a key selling point (flexibility, location knowledge, scale, etc.) and “asset base” to outperform its peers.
TaskUs seeks to invest heavily in its employees and prioritizes their well-being. This approach includes providing competitive compensation, career development opportunities, and a positive workplace culture. The objective is to attract and retain top talent, in a human-capital intensive industry.
As the absolute headcount illustrates, the company is reliant and tethered to headcount in order to drive growth, with c.£20k revenue per head. This will restrict the incremental gains possible with greater scale.
TaskUs serves a diverse client base, with a strong presence in the technology, e-commerce, healthcare, gaming, and financial services sectors. This diversification reduces dependency on any single industry, although it is clear the business is focused on high-growth industries. This focus has allowed for accelerated brand penetration, contributing to consistent positive customer wins.
Due to the weaknesses associated with its business model (weighting toward human capital), Management has invested heavily in its technological capabilities. The company is seeking to incorporate advanced technologies such as AI, machine learning, and data analytics into its service offerings to enhance efficiency, accuracy, and customer experience. We consider this the key value driver in the future, as it will contribute to outperformance relative to its current trajectory, which (simplistically) involves increasing headcount by x to achieve y level of growth.
Management’s strategic focus is on three growth levers:
- Growth with big tech and enterprise clients - Management is seeking to continue its penetration within the technology/enterprise segment. This has shown weakness in recent quarters (which we discuss later) but we broadly consider this a good approach. The technology/Healthcare industries are expected to grow well in the coming years and outperform economic growth.
- Leveraging its specialized services and industry expertise - Technological development will be the key to standing out both commercially and financially. Its early work around AI appears promising and positions the business well to outperform traditional outsourcing companies.
- Global expansion (Particularly Europe and Asia) - Having developed a strong foundation, the business is seeking to expand globally, allowing for increased scale and revenue generation opportunities. TaskUs acquired heloo in 2022 , underpinning its commitment to growing in the European market in particular. The company has similar capabilities to TaskUs, representing a good opportunity to share capabilities and increase scale.
Outsourcing industry
According to Grand View Research, the BPO industry is expected to grow at a CAGR of 9.4% into FY23, with scope for outperformance driven by a focus on technological trends such as AI and Cloud computing. As a growing business with a focus on higher-growth segments, TaskUs is positioned to outperform this level.
TaskUs competes with several BPO and customer service outsourcing companies, including Teleperformance ( TLPFF ), Concentrix ( CNXC ), and Sitel Group.
We consider the following factors to be key in the coming years:
- Rising Demand for Outsourcing - In an increasingly competitive and changing business landscape, companies are seeking outsourcing partners to reduce costs, improve operational efficiency, and access specialized skills.
- Digital Transformation - The digital transformation of industries has created opportunities for businesses to support clients beyond simple tasks, such as in areas like customer support for online platforms, content moderation, and digital marketing.
- Acquisitions - Strategically acquiring smaller peers, both to quickly access markets and broaden/deepen its expertise will be critical in the coming years. We would like to see Management do more in this regard.
- Global Expansion - Strategically expanding globally creates the opportunity to serve global clients and access growing markets.
- Innovation and Technology - By incorporating AI, machine learning, and data analytics into its services successfully , TaskUs has the potential to improve the quality of its services while reducing its own incremental costs, contributing to a win-win situation.
Margins
Margins (OPM GPM NIM Operating profit )
TaskUs’s margins have declined over the historical period, even prior to the pandemic period. This is a reflection of the company’s aggressive growth strategy, contributing to margin dilution as greater revenue is achieved. Although controversial, we are broadly supportive of this occurring, particularly if the growth is high. The overall net gain will be higher.
The concern is that margin deterioration has been large, with c.5% of EBITDA-M lost since FY18. This makes the offsetting gains less compelling. Net Income has only grown at a CAGR of 5%, illustrating this.
We would like to see a renewed focus on margins and increased strategic allocation toward higher-margin services now that the brand has been developed further. We expect this to come from the second of Management’s three growth pillars (technological development).
Quarterly results
TaskUs’s financial performance has noticeably declined in recent quarters, contributing to the substantial share price decline as investors adjust their future expectations of the company. Revenue growth in the last 4 quarters was +15.5%, +6.8%, (1.8)%, and (7.0)%, illustrating the compounding slowdown. This is a reflection of weakness in the market, particularly in the Tech section, which has contributed to a reduction in demand and a decline in new customer wins.
The issue with a business like this is that its human-capital-heavy nature means its cost base has a high fixed portion, contributing to greater downward sensitivity to margins. During this period, EBITDA-M has declined, with Q2 falling to 16.3%. Our concern is that it is likely the slowdown will continue in the near term, which implies a continuation of this weakness.
The key takeaways from its most recent quarter are:
- A continuation of the near-term trend of reduced client volumes. Management is forecasting a full-year decline of (5.8)% in response, with the view that the current environment will remain. This appears reasonable in our view, as Government policy remains razor-focused on ensuring inflation declines, limiting the scope for expansionary policy in 2023.
- The strategic focus is on delivering the company’s “three-tier” growth strategy. The business has signed several Gen AI contracts within the HealthTech space, while the business has seen strong growth in regions such as LatAm.
- TaskUs continues to roll out new technologies/services, including TaskGPT. In addition to this, investment in the creation of new services, particularly AI-related, continues.
Overall, this has been a difficult quarter for the business. Its exposure to volatile industries and regions means TaskUs’s revenue is cyclical. The development of its services is positive, however, it is far too early to suggest this will be a growth driver in the years to come. We will await a consistent outperformance by its AI segment to conclude on this.
Balance sheet & Cash Flows
TaskUs’s balance sheet is relatively clean. The company is conservatively financed, with a ND/EBITDA ratio of 0.9x. This provides the optionality of increasing returns to shareholders or reinvesting within the business organically or inorganically.
Although TaskUs’s FCF margin has improved to an impressive 14%, this is following 4 periods of <10% FCF in the last 4 fiscal years. This is a reflection of poor working capital management, with regular swings in Accounts Receivable. We would like to see improved controls to smooth out cash returns.
Outlook
Presented above is Wall Street's consensus view on the coming 3 years.
Analysts are forecasting a slowdown in the company’s growth rate, with a CAGR of 4% into FY25F. In conjunction with this, margins are expected to remain flat.
We consider these assumptions to be broadly reasonable, although are leaning toward the conservative end. TaskUs is clearly struggling, however, this is heavily tied to macro conditions, which will likely ease in the coming 6-12 months. Beyond this, the company is positioned well to revert back to an attractive growth rate, as its services provided will only grow in importance, particularly AI.
Margin improvement is more difficult to assess. With greater scale in its less capital-intensive services, there should be upward pressure, although it will likely take several years for these services to grow to a sufficient size to dilute its core, human-intensive services.
Industry analysis
Data Processing & Outsourced Services Stocks (Seeking Alpha)
Presented above is a comparison of TaskUs' growth and profitability to the average of its industry, as defined by Seeking Alpha (17 companies).
TaskUs underwhelms relative to its peers. The company’s growth has been strong but when benchmarked, it is inconclusive, particularly when also factoring in profitability. This underperformance is a reflection of its cyclicality. Many of its peers are more deeply ingrained within their clients’ services and target larger, more stable companies. The issue here is that TaskUs is not positioned to target these blue-chip companies and so this is an inherent weakness of its size.
Further, TaskUs’s margins are broadly on par with the wider industry, although does have some areas of outperformance. We attribute this to the company’s focus on high-growth and lucrative industries, as well as its product development. Although the scope for efficiencies is limited, we do see scale contributing to margin improvement, suggesting its size-adjusted margins are higher than its peers.
Valuation
TaskUs is currently trading at 6.5x LTM EBITDA and x NTM EBITDA. This is a discount to its historical average (noting a short trading history).
A discount to its historical average appears reasonable in our view, primarily due to the change in future expectations. Margins have declined and the downside risks associated with its business model have been exposed. This said, the business has scope for margin stabilization and a return to growth following a difficult period in 2024. At a NTM discount of over 100%, this appears excessive.
Further, the company is trading at a discount to its peer group, with a c.54% discount on an LTM EBITDA basis and a 50% discount on a NTM P/E basis. A discount again appears reasonable in our view, as the company’s financial performance is uncompelling relative to peers currently and its expansion into tech-enabled services remains a small portion of revenue. This said, with comparable margins and scope for high growth and innovation within its business model, we believe the discount is unreasonable.
Our assessment of valuation is heavily weighted toward the peer group analysis given its short trading history. Based on this, we see upside with the stock, underpinned by an attractive NTM FCF yield of 12.2%. The business is far from perfect and requires foundation-level improvements but at a c.50% discount, we see upside of 20-30% on the conservative side (Analysts’ target price suggests a 48% upside).
Key risks with our thesis
The risks to our current thesis are:
- Cyclicality - With current economic conditions depressed, the return to growth remains uncertain. Management believes the business is positioned well for this return, as do we, but delays in its coming will contribute to further share price struggles and top-line weakness.
- FX - With an expansion of its business globally, TaskUs will face even greater FX risk associated with repatriating earnings.
- Wage inflation - As a labor-heavy business, wage inflation is a key risk, one which has contributed to the margin erosion already experienced. The concern is that with inflation remaining stubborn globally, this will continue to be a heightened risk in the near term.
Final thoughts
TaskUs is a quality business. Management’s focus on particular industries and the expansion of its technological capabilities has allowed the business to grow well and develop its brand. We suspect it can grow well in the medium term through purely market expansion and greater penetration, although requires an upswing in market conditions.
There remains uncertainty around its normalized financial performance and how its tech services will do in the market but we believe this is compensated through its valuation. A buy rating may be early at this stage but at a <7x EBITDA multiple, this might be the cheapest exposure to tech investors will find. With a sticky service that Tech firms will not want to in-house due to margin dilution, TaskUs can ride their success long term.
For further details see:
TaskUs: Technology-Enabled Outsourcing Company With AI Capabilities