NEORIS, First Derivative And GenAI Will Expand Global Opportunities

Key Takeaways

• Acquisitions and AI integration aim to boost revenue and client relations, despite difficulties in converting demand into higher prices.
  
• Global talent expansion and cost optimization seek margin improvement, but macro risks and cautious client spending threaten profitability.
  
• EPAM Systems is challenged by pricing pressures, investment in AI initiatives, integration risks from acquisitions, geopolitical uncertainties, and shifting to lower-cost geographies.

Catalysts

Provides digital platform engineering and software development services worldwide.

• EPAM Systems’ recent acquisitions of NEORIS and First Derivative are expected to expand their global footprint, deepen client relationships, and open new markets, providing the potential for revenue growth.
  
• The company's GenAI and AI capabilities are being actively integrated into client projects, which should enhance revenue streams through new product offerings and efficiencies, although the initial demand for such technologies has been challenging to convert into higher prices.
  
• Investment in becoming a more globally balanced talent company with significant growth in key delivery centers such as India and Latin America aims to leverage cost benefits and improve net margins as EPAM expands its global service delivery model.
  
• Anticipated challenges such as broad macroeconomic risks, geopolitical tension, and policy-specific uncertainties may slow margin progression rates, particularly if client discretionary spending remains cautious, impacting profitability.
  
• Continued cost optimization programs, retention of top talent through compensation policies, and the limited ability to pass on price increases could pressure EPAM's operating margins in the near term while they invest for future growth.

EPAM Systems Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on EPAM Systems compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming EPAM Systems's revenue will grow by 7.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.6% today to 8.1% in 3 years time.
• The bearish analysts expect earnings to reach $475.6 million (and earnings per share of $8.25) by about April 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 bearish analyst cohort, the company would need to trade at a PE ratio of 27.4x on those 2028 earnings, up from 19.0x today. This future PE is lower than the current PE for the US IT industry at 32.6x.
• 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 7.8%, as per the Simply Wall St company report.

EPAM Systems Future Earnings Per Share Growth

Risks

• EPAM Systems faces ongoing pricing pressures due to a challenging environment and the limited ability to offset rising compensation costs which could negatively impact net margins and operating income.
  
• The company must balance investments in transformative GenAI and AI-native initiatives with short-term margin impacts, risking further squeeze on profits if these investments take longer to produce returns.
  
• Integration risks from recent acquisitions, like NEORIS and First Derivative, pose challenges which could dilute earnings margins, as their profitability levels are lower than EPAM's stand-alone business.
  
• Macroeconomic uncertainties and geopolitical tensions, especially in regions like Ukraine, may affect EPAM's operations and ability to deliver, potentially constraining revenue growth and putting profitability at risk.
  
• The ongoing shift to lower-cost geographies for talent and services expansion could create a headwind on revenue growth per headcount due to inherently lower pricing models, further pressuring revenue figures.

Valuation

• The assumed bearish price target for EPAM Systems is $195.99, which represents one standard deviation below the consensus price target of $232.92. 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 more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $300.0, and the most bearish reporting a price target of just $170.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $475.6 million, and it would be trading on a PE ratio of 27.4x, assuming you use a discount rate of 7.8%.
• Given the current share price of $152.6, the bearish analyst price target of $195.99 is 22.1% 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.