AI Projects And Margin Pressures Will Challenge Progress Yet Support A Gradual Earnings Upswing

Catalysts

About Grid Dynamics Holdings

Grid Dynamics Holdings provides AI focused digital engineering and consulting services to large enterprises across multiple industries.

What are the underlying business or industry changes driving this perspective?

• Although AI related work already contributes over 25% of quarterly organic revenue and is growing sequentially, much of this demand is tied to early projects. These projects may not all convert into sustained programs, which could limit the benefit to long term revenue growth.
• Although the company is repositioning around AI first delivery and Agentic AI platforms that can expand project scope with large enterprises, many clients are still waiting for off the shelf solutions. This may delay custom builds and slow the expected uplift to billable head count and revenue.
• The shift to higher margin geographies, AI driven pricing and portfolio rebalancing is targeted to lift margins by at least 300 basis points. However, FX headwinds and the cost of operating in 19 countries could offset some of these efforts and cap improvement in gross margin and EBITDA margin.
• Partnership influenced revenue already accounts for over 18% of total revenue and the company is investing alongside hyperscalers, ISVs and NVIDIA. At the same time, deeper reliance on partners for pipeline creation could expose Grid Dynamics to slower conversion or changing partner priorities, affecting revenue growth and earnings.
• AI first SDLC, Agentic AI and Physical AI open up new work in areas such as legacy modernization, industrial robotics and enterprise platforms. These complex programs often require upfront investment and long pilots, which could weigh on near term net margins even if they support earnings over time.

Assumptions

This narrative explores a more pessimistic perspective on Grid Dynamics Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Grid Dynamics Holdings's revenue will grow by 14.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.4% today to 5.3% in 3 years time.
• The bearish analysts expect earnings to reach $32.3 million (and earnings per share of $0.38) by about February 2029, up from $13.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.7x on those 2029 earnings, down from 42.8x today. This future PE is greater than the current PE for the US IT industry at 22.9x.
• The bearish analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.83%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A meaningful share of current AI projects are still pilots and proofs of concept. Many enterprises are waiting for commercial off-the-shelf software before committing to large, recurring programs, which could limit conversion into long-term contracts and weigh on revenue and earnings.
• Exposure to 19 countries and a broad currency basket has already had an adverse FX impact on EBITDA. Ongoing FX swings between the US dollar, Europe, Latin America and India could continue to pressure gross margin and EBITDA margin even if the top line continues to grow.
• Retail is still the largest vertical, and its revenue declined sequentially and year on year in the latest quarter. Any prolonged weakness or further rationalisation among large retail customers could offset strength in TMT and finance and slow overall revenue and earnings growth.
• The business is concentrating more on larger clients, with the customer count falling to 186 and the top 10 customers making up 58.3% of revenue. This raises the risk that issues at a few clients or vendor consolidation could hurt revenue, utilization and net margins.
• The plan to expand margins by at least 300 basis points depends on executing headcount reshuffles, geographic mix changes and AI-driven efficiency. If these do not land as expected or require extra restructuring, operating expenses could stay elevated and limit improvement in EBITDA margin and net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Grid Dynamics Holdings is $9.0, which represents up to two standard deviations below the consensus price target of $12.3. This valuation is based on what can be assumed as the expectations of Grid Dynamics Holdings's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $607.1 million, earnings will come to $32.3 million, and it would be trading on a PE ratio of 30.7x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $7.0, the analyst price target of $9.0 is 22.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.