Acquisitions And GenAI Services Will Open New Global Markets

Key Takeaways

• Strategic acquisitions and AI service focus are driving revenue growth in new markets and GenAI projects, enhancing profitability.
  
• Expansion in India and strong sector momentum support competitive advantage and earnings growth, particularly in life sciences and AI programs.
  
• Broad macro risks and client cost sensitivity might restrict discretionary spending, impacting EPAM's revenue, while integration challenges and wage inflation pressure profitability.

Catalysts

Provides digital platform engineering and software development services worldwide.

• EPAM Systems’ strategic acquisitions of NEORIS and First Derivative are anticipated to significantly expand their global client relationships and penetrate new markets. This is expected to boost revenue growth as these acquisitions have already opened new joint pursuits and opportunities.
  
• The company’s focus on leveraging its expertise in AI-enabled digital business services positions the company to capitalize on the increasing demand for GenAI-related projects. This could drive substantial revenue growth as these services gain traction across their client base, particularly in transformative AI programs.
  
• The significant growth in their operations in India, now their largest single delivery country, provides EPAM Systems with a competitive cost advantage. This expansion could enhance net margins through improved utilization of cost-effective talent, which is crucial for maintaining profitability against a backdrop of growing salary pressures.
  
• The strong sequential momentum seen within 2024, especially in life sciences, healthcare, software, and hi-tech, along with a recovering financial services vertical, is likely to enhance earnings growth. The company’s ability to execute and expand in these sectors underscores its resilient growth trajectory.
  
• With 75% of its top 100 clients already engaged in GenAI initiatives, EPAM Systems is well-positioned to drive substantial earnings growth. The shift towards larger scale AI programs with proven business cases presents a significant opportunity to enhance both revenue and net margins.

EPAM Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on EPAM Systems compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming EPAM Systems's revenue will grow by 14.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 9.6% today to 10.1% in 3 years time.
• The bullish analysts expect earnings to reach $715.0 million (and earnings per share of $12.45) by about May 2028, up from $454.5 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 24.8x on those 2028 earnings, up from 19.7x today. This future PE is lower than the current PE for the US IT industry at 31.8x.
• Analysts expect the number of shares outstanding to decline by 1.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

EPAM Systems Future Earnings Per Share Growth

Risks

• There is a notable caution due to broad macro risks and policy-specific uncertainties driven by a dynamic geopolitical environment, which could affect client sentiment and delay spending, impacting EPAM's revenue growth.
  
• Ongoing cost sensitivity among clients is influencing spending decisions, which might restrict EPAM's ability to leverage demand for discretionary projects, impacting revenue and net margins.
  
• The integration of recent acquisitions, NEORIS and First Derivative, is placing pressure on margins due to their lower profitability compared to EPAM's core business, potentially affecting earnings.
  
• Wage inflation, especially in offshore locations, is outpacing the ability to achieve pricing increases, creating margin pressure and impacting overall profitability.
  
• There's a significant reliance on accelerating demand for GenAI and AI-related capabilities, which if it does not materialize as expected, could limit EPAM's growth potential and affect future revenues.

Valuation

• The assumed bullish price target for EPAM Systems is $267.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of EPAM Systems'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 $267.0, and the most bearish reporting a price target of just $167.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $7.1 billion, earnings will come to $715.0 million, and it would be trading on a PE ratio of 24.8x, assuming you use a discount rate of 7.8%.
• Given the current share price of $157.88, the bullish analyst price target of $267.0 is 40.9% 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.