Delayed North America Deals Will Slow Progress Yet Preserve Promise

Key Takeaways

• Elongated deal cycles and client delays are causing short-term revenue uncertainty, despite growth opportunities from AI adoption and digital transformation trends.
  
• Shift toward automation and expanding high-margin services faces risks from pricing pressure, wage inflation, and high revenue concentration among a few large clients.
  
• Macro headwinds, AI-driven automation, intense pricing competition, regional softness, and client concentration are creating pressure on growth, profitability, and revenue predictability.

Catalysts

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

• While Endava is well-positioned to benefit from the accelerating adoption of AI and digital transformation across industries, near-term revenue growth is being hampered by elongated enterprise deal cycles and delays in large contract signings, particularly in North America and key verticals like automotive and healthcare. This lag in pipeline conversion not only pushes anticipated revenue into future quarters but also increases the risk of an extended air pocket in top-line growth if macroeconomic uncertainty persists.
  
• Despite the company's deep partnerships with leaders such as OpenAI and Google Agentspace and a growing demand for advanced AI-driven digital services, the broader trend toward automation-including testing and routine software development-may drive further efficiency gains for clients, potentially reducing the overall demand or lowering pricing power for some of Endava's more commoditized outsourcing services, putting pressure on both revenue per head and net margins as the business mix evolves.
  
• Although Endava continues to expand its pipeline of large, transformative digital modernization projects and deepen C-suite relationships, many of these deals remain subject to client-specific delays stemming from organizational restructurings, M&A activity, cost takeout initiatives, and tariff/supply chain disruptions outside Endava's control. This unpredictability in deal closure timing undermines near-term revenue visibility and could result in a temporary drag on earnings despite strong long-term secular tailwinds.
  
• While Endava remains focused on geographic expansion and diversifying its client base, revenue concentration remains high among its largest clients, and the dependence on North America for growth exposes the company to FX headwinds and regional economic volatility. This, coupled with declining client counts above the £1 million revenue threshold, heightens the risk of episodic revenue volatility and increases sensitivity of both earnings and cash flow to isolated client or sector shocks.
  
• Although Endava's investment in proprietary platforms and ongoing workforce reskilling toward higher-margin AI, data, and cloud offerings is strengthening its long-term competitive positioning, the shift comes with rising wage inflation in talent pools, higher attrition during the skill transition, and competitive pricing pressures-particularly for core digital transformation services. As a result, there is a risk that both gross and net margin expansion could stall in the medium term if revenue growth does not accelerate to offset these evolving cost dynamics.

Endava Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Endava compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Endava's revenue will grow by 5.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.3% today to 3.4% in 3 years time.
• The bearish analysts expect earnings to reach £31.1 million (and earnings per share of £0.61) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 26.6x on those 2028 earnings, down from 30.9x today. This future PE is lower than the current PE for the US IT industry at 29.7x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.48%, as per the Simply Wall St company report.

Endava Future Earnings Per Share Growth

Risks

• The company is facing prolonged macroeconomic uncertainty and global turbulence, resulting in a slower conversion of its opportunity pipeline into revenue and elongating the sales cycle, which could constrain both top-line growth and overall earnings in the coming years.
  
• Widespread adoption of AI and automation, including by clients themselves, is sharply reducing demand for lower-value services such as testing and legacy application maintenance, leading to headcount reductions and creating the risk that productivity gains and automation will erode the addressable market and put sustained pressure on revenue growth.
  
• Fierce pricing competition and aggressive bidding by industry peers are making the IT services market more commoditized, forcing Endava to give pricing concessions on large contracts and increasing the risk of net margin compression even if headline rates appear stable on average.
  
• The business is experiencing softness or decline in key geographic markets, particularly in North America due to both FX headwinds and client caution in sectors like healthcare and automotive, as well as a double-digit revenue decline in Europe, indicating risks to organic revenue growth and the effectiveness of geographic diversification.
  
• Endava's revenue remains relatively concentrated among its top ten clients, which now account for a larger portion of total revenue year-over-year, exposing the company to client-specific shocks that could create unpredictable revenue and earnings volatility if large clients reduce their spend, delay projects, or change strategic direction.

Valuation

• The assumed bearish price target for Endava is $13.99, which represents the lowest price target estimate amongst analysts. 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.6, and the most bearish reporting a price target of just $13.99.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £920.2 million, earnings will come to £31.1 million, and it would be trading on a PE ratio of 26.6x, assuming you use a discount rate of 10.5%.
• Given the current share price of $12.71, the bearish analyst price target of $13.99 is 9.2% 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.