Cloud, AI And Automation Will Fuel Long-Term Digital Momentum

Key Takeaways

• Deep partnerships and a focus on AI, cloud, and data uniquely position Endava for outsized growth, premium pricing, and higher margins across regulated verticals.
  
• Large modernization deals and underpenetrated markets suggest accelerated revenue and cash flow expansion beyond current expectations.
  
• Rapid industry shifts toward AI, competition, and client concentration threaten Endava's revenue stability, margin growth, and ability to swiftly transition to higher-value services.

Catalysts

Provides technology services in North America, Europe, the United Kingdom, and internationally.

• Analyst consensus anticipates revenue lifts from AI-powered offerings, but given Endava's tight integration with OpenAI's Beta Services Partner Program and Google Agentspace as a go-to-market partner, there is substantial upside for rapid, first-mover client wins and step-changes in AI-related services, which could drive sustained double-digit revenue growth and increased wallet share.
  
• Analysts broadly agree that large and long-term core modernization contracts will stabilize topline growth, yet the expanding pipeline-up to 24 transformative mega-deals now, with deals shifting Endava into strategic-C-suite relationships-could rapidly accelerate revenue growth, contract duration, and overall client spend-per-customer beyond consensus expectations.
  
• Endava's aggressive partnership ecosystem, including alliances with AlixPartners, Backbase, and SideFX, uniquely positions it to capture fast-emerging and highly regulated vertical markets (e.g., finance, healthcare, media), supporting premium pricing, diversification, and structurally higher gross margins over time.
  
• The company's laser focus and investment in high-value areas like cloud, data, and AI, combined with a proven ability to reskill at scale amid shifting enterprise needs, mean it is well-poised to benefit disproportionately from ongoing IT talent shortages globally, enhancing utilization, pricing power, and net margin expansion.
  
• Digital transformation and automation spend remains in the early stages across North America and Continental Europe, regions where Endava remains underpenetrated but is already delivering hyper-scale wins-suggesting significant, longer-term acceleration in both revenue and free cash flow generation as these markets mature.

Endava Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Endava compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Endava's revenue will grow by 5.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.3% today to 6.4% in 3 years time.
• The bullish analysts expect earnings to reach £59.0 million (and earnings per share of £0.98) by about August 2028, up from £18.2 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 bullish analyst cohort, the company would need to trade at a PE ratio of 40.4x on those 2028 earnings, up from 29.6x today. This future PE is greater than the current PE for the US IT industry at 27.7x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.72%, as per the Simply Wall St company report.

Endava Future Earnings Per Share Growth

Risks

• The accelerating adoption of generative AI and automation is sharply reducing demand for traditional IT services like testing, driving Endava to rapidly reskill its workforce, which could suppress revenue growth as legacy work shrinks faster than new AI and cloud revenues ramp.
  
• Delays and lower-than-expected conversion rates for large deals in core verticals such as banking, payments, and healthcare expose the company to revenue volatility and raise concerns over sustained earnings growth, especially as clients rapidly shift spending priorities in a choppy macro environment.
  
• Intensifying competition and increasing pricing pressures, including aggressive price pitching by peers and commoditization in lower-value IT and application maintenance work, are likely to limit day rate expansion and put downward pressure on net margins.
  
• Endava remains overexposed to a concentrated set of large clients (with its top 10 clients accounting for 39 percent of revenue, up from the prior year), increasing the risk of revenue loss or margin compression if key clients reduce spend or shift vendors.
  
• Wage inflation and rising compliance costs in Eastern Europe and Latin America, combined with the company's struggle to quickly shift its service mix to higher-value, AI-driven offerings, could cause gross margin compression and limit upside to long-term earnings quality.

Valuation

• The assumed bullish price target for Endava is $40.01, which represents two standard deviations above the consensus price target of $22.91. This valuation is based on what can be assumed as the expectations of Endava's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $41.96, and the most bearish reporting a price target of just $13.78.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £918.8 million, earnings will come to £59.0 million, and it would be trading on a PE ratio of 40.4x, assuming you use a discount rate of 10.7%.
• Given the current share price of $12.18, the bullish analyst price target of $40.01 is 69.6% 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.