AI And Geopolitical Risks Will Limit Demand Yet Offer Hope

Key Takeaways

• Rapid AI automation poses a threat to outsourced IT services demand, pressuring future revenue growth and utilization rates despite innovative offerings.
  
• Rising compliance costs, competition, and geopolitical barriers could erode margins and limit global expansion, even as demand for modernization grows.
  
• Slowing revenue growth, client hesitancy toward new AI models, cost-cutting measures, and rising competitive threats are challenging Globant's profitability and long-term growth prospects.

Catalysts

Provides technology services worldwide.

• While Globant's Enterprise AI platform and AI Pods subscription model are being adopted by a growing group of clients and present an opportunity for improved margin expansion, the rapid pace of artificial intelligence automation in software engineering carries the risk that clients could increasingly automate core development tasks themselves, potentially reducing longer-term demand for outsourced IT services and putting pressure on both future revenue growth and utilization rates.
  
• Despite strong partnerships with leading AI and cloud providers and a pipeline at an all-time high, persistent geopolitical fragmentation and digital protectionism could hinder Globant's ongoing expansion into new markets, restricting global revenue diversification and future earnings potential by limiting access to lucrative cross-border IT projects.
  
• Although there is rising demand from enterprises seeking to modernize operations and integrate multiple AI models and platforms-an area where Globant is investing heavily in both technology and talent-compliance with increasingly complex data privacy and regulatory frameworks may escalate operating costs over the coming years, eroding net margins as the need for secure, auditable software increases.
  
• While the company cites enhanced customer experience offerings and success with its industry-focused studios as reasons for optimism, intense and rising competition from larger technology consulting firms and niche digital transformation specialists could exert downward pressure on pricing, particularly as clients seek to optimize IT spend, ultimately constraining gross margin improvement and slowing top-line revenue growth.
  
• Despite a highly diversified client base and progress in large, strategic accounts, Globant's recent workforce reductions and office consolidation are aimed at protecting near-term profitability but also reflect a subdued demand environment-ongoing tech talent shortages or wage inflation in key delivery locations may further increase SG&A expenses, capping the recovery in EBITDA margins if revenue growth does not reaccelerate as anticipated.

Globant Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Globant compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Globant's revenue will grow by 1.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.4% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach $195.9 million (and earnings per share of $4.18) by about August 2028, up from $110.3 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 22.8x on those 2028 earnings, down from 26.6x today. This future PE is lower than the current PE for the GB IT industry at 29.8x.
• Analysts expect the number of shares outstanding to grow by 2.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.68%, as per the Simply Wall St company report.

Globant Future Earnings Per Share Growth

Risks

• The company is experiencing a notable slowdown in revenue growth, with year-over-year increases of just 4.5% in the latest quarter and a full-year outlook of only 1.2%, indicating that its past strong growth trend may be flattening and putting long-term earnings growth at risk.
  
• The adoption of Globant's new AI subscription and Agentic delivery models, while innovative, remains in the very early stages (with only 18 customers) and faces uncertainties around client acceptance, scalability, contracting risks, and potential margin pressures if quality supervision remains labor intensive, all of which could impact future profitability and revenue predictability.
  
• Management acknowledes that macroeconomic uncertainty and elongated sales cycles persist, which could delay the conversion of its record pipeline into realized revenue, thereby posing a challenge to near
• and medium-term revenue growth.
  
• Globant's workforce reduction and business optimization plan, including laying off 1,000 employees and office consolidation, underscores internal cost pressure and suggests that demand is less robust than in the past, which may limit its ability to drive margin expansion and scale profitably.
  
• As AI and automation capabilities mature rapidly across the industry, clients may increasingly opt to in-house or automate traditional software development, or choose integrated end-to-end platforms from larger hyperscalers, thereby increasing competitive pressure, compressing margins, and threatening Globant's long-term market share and revenue streams.

Valuation

• The assumed bearish price target for Globant is $74.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Globant'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 $160.0, and the most bearish reporting a price target of just $74.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $195.9 million, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $66.46, the bearish analyst price target of $74.0 is 10.2% 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.