Generative AI Will Cripple Legacy IT Consulting

Key Takeaways

• Rapid AI and automation adoption, along with hyperscale platform dominance, threatens Endava's core revenue streams and ability to win new enterprise clients.
  
• Rising costs, increased reliance on a few large clients, and growing compliance burdens heighten risks to profitability and revenue stability.
  
• Aggressive AI-driven transformation, strategic partnerships, and expansion into key sectors and geographies position Endava for resilient, long-term growth with improved margins and revenue stability.

Catalysts

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

• The accelerated adoption of generative AI and automation is poised to materially reduce demand for outsourced IT services as more enterprise clients automate workstreams internally or shift toward lower-cost, self-serve solutions, significantly compressing Endava's addressable market and driving long-term stagnation or decline in revenue.
  
• Increased market dominance by hyperscale cloud vendors and software platforms is expected to further disintermediate traditional IT consulting and custom development providers, limiting Endava's ability to capture new enterprise deals and leading to persistent downward pressure on both revenue and margins.
  
• Heightened talent competition and wage inflation in Endava's primary delivery regions, especially in Central/Eastern Europe and Latin America, will drive up operating expenses while constrained pricing power and ongoing client spend rationalization erode net margins over time.
  
• The company's growing reliance on a small number of large clients exacerbates the risk of revenue volatility, as spending reductions or lost contracts among its top ten customers, now responsible for an increasing share of total revenue, could trigger sharp declines in both earnings visibility and revenue stability.
  
• Emerging protectionist policies and stricter data localization requirements driven by geopolitical tensions will introduce costly compliance burdens and operational complexities, directly impacting Endava's long-term profitability and raising the likelihood of margin compression and reduced earnings growth.

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 neither grow nor shrink over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2.7% today to 2.1% in 3 years time.
• The bearish analysts expect earnings to reach £16.4 million (and earnings per share of £0.29) by about September 2028, down from £21.2 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 25.2x on those 2028 earnings, up from 17.8x today. This future PE is lower than the current PE for the US IT industry at 29.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.52%, as per the Simply Wall St company report.

Endava Future Earnings Per Share Growth

Risks

• Endava's aggressive transformation to become an AI native solutions provider, coupled with deep partnerships with OpenAI, AWS, Microsoft, and Google Cloud, positions it to benefit from the secular acceleration of digital transformation and surging enterprise adoption of generative AI, which could drive sustained multi-year revenue growth and expand its addressable market.
  
• The company is reporting its highest ever signed order book value and has secured eight new multi-year strategic deals, increasing contracted and committed revenue visibility to over 70% for the next fiscal year-a trend that could stabilize or grow revenues despite recent macro headwinds.
  
• Expanding value-added service offerings, such as outcome-based and transaction-based pricing, along with offerings like Endava Flow, could improve both productivity and delivery speed, leading to higher client stickiness, margin enhancement, and longer engagement cycles, which support better net margins and topline revenue over time.
  
• Strategic expansion into high-growth verticals (Banking, Capital Markets, Insurance, and Health Care) and geographies (especially North America), along with acquisitions such as GalaxE, unlocks new growth channels and client diversification, offering resilience and potential for above-market growth rates in revenue and profits.
  
• Endava's strong and growing relationships with large, blue-chip clients-including long-term extensions with Mastercard, Reed Exhibitions, and major global financial institutions-provide a foundation for stable recurring revenue and reduced client concentration risk, thereby supporting predictability in earnings and cash flow.

Valuation

• The assumed bearish price target for Endava is $9.43, 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 $42.82, and the most bearish reporting a price target of just $9.43.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £772.3 million, earnings will come to £16.4 million, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of $9.4, the bearish analyst price target of $9.43 is 0.3% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
  
• 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.