Today every business is a technology business, but there are millions of organisations out there struggling to get the best out of modern tech. What the internet started, things like AI (artificial intelligence), automation, cloud computing, data analytics and much else, are continuing in terms of increased complexity for both providers and users.
This is an opportunity right up the street of Wall Street-listed EPAM Systems (EPAM:NYSE). You might not be familiar with the name, but few companies embody the partnership of strategic leadership stability and innovation quite like digital transformation and software developer EPAM, even fewer at its current valuation.
This is a stock that has typically traded on PE (price to earnings) ratios in the 25 to 40 range over the past decade yet is currently available at a multiple of less than 15. Returns on capital (13.6%) and equity (11.6%) have run consistently in double-digits and have been nearer 20% levels for both in the past.
This suggests a business currently facing temporary difficulties but where there is scope for substantial recovery. This view is born out by operating margin trends, which have fluctuated over the years, but have generally remained within the 10% to 14% range, and have been as high as 16.5%.
The business is debt-free and throws off plenty of free cash, so it has plenty of scope to reinvest in the business, although it does not pay dividends.
Yet the shares have flopped this year, down 27%. So why has the stock been stinking up the market?
Looking at company specifics, Q4 2024 results in February beat forecasts with EPS (earnings per share) $2.84 on $1.25 billion revenue (up 8% year-on-year), yet 2025 guidance was soft, with EPAM projecting revenue growth of 10% to 15% but EPS to come in roughly flat.
Over the following weeks or so, the shares lost more than 22% and they have continued to decline since. Shares believes this is an opportunity.
NAVIGATING A COMPLEX BUSINESS LANDSCAPE
Let’s be clear, EPAM has been navigating a complex business landscape, complicated macroeconomic uncertainties, geopolitical instability and potential industry headwinds. Yet EPAM has continued to produce robust financial performance and push ahead with strategic initiatives, such as developing and integrating AI-native solutions which should become emerge as the engine of future growth, such as custom-built systems that embed AI into clients’ core business processes.
The indicators seem to be improving. For a start, Q1 2025 results (announced 8 May) again surpassed (albeit lowered) estimates, putting up EPS of $2.41 on $1.3 billion revenue compared to consensus estimates of $2.29 and $1.28 billion respectively.
Analysts at Stifel, Mizuho and TD Cowan were among a number to raise 2025 and 2026 forecasts, and while increases were modest, this is a good sign of improving confidence in EPAM’s future performance.
Mizuho analysts drew a direct link to EPAM’s solid Q1 performance to the success of its new technology integration, such as GenAI (generative AI), which appears to be driving the company’s demand recovery. ‘After enduring a difficult period for IT services spending over the past two and a half years, EPAM is now well-positioned to enhance its organic revenue growth in 2025 and 2026,’ they wrote in a note to clients.
The Q1 figures and commentary looked set to spark a sharp share price recovery, yet after jumping 13% directly after the results, the share price has drifted once again, presumably a response lingering economic uncertainty and escalating troubles in the Middle East.
So where does this leave us now? Koyfin consensus has the market still projecting flat EPS in 2025 but a return to double-digit growth in 2026 and 2027. Over the next three years (including 2025), consensus anticipates average annual growth in earnings and revenues at 8% and 10% respectively, putting the stock on a three-year average PE of 13.9.
To Shares, it looks like an awful lot of gloom is currently priced in with little or no expectation for recovery and growth. That could change fast if EPAM continues singing a more optimistic tune over the coming quarters. Put it this way, a 5% increase to 2026 and 2027 EPS estimates and a share price re-rating to a PE of, say, 18, could indicate a $255 share price, close top high-end analyst price targets.
While a re-rating to past PE levels of 25, for example, would put a stock level of $355 on the cards.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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