AI Investment And Middle East Demand Will Unlock Opportunities

Key Takeaways

• Strong AI investment strategy may face challenges from rapid industry advancements and increased competition, impacting pricing power and margins.
  
• Uncertainty in new market growth and macroeconomic conditions could hinder revenue projections, affecting financial performance and anticipated revenue from innovations.
  
• Heavy AI investment may not yield expected returns, with risks from political volatility, project delays, intense competition, and reliance on a few large clients.

Catalysts

Provides technology services worldwide.

• Globant's strong AI investment strategy positions them for future revenue growth, but there is a risk that AI advancements across the industry could lead to commoditization, potentially limiting their pricing power and impacting margins.
  
• The company anticipates growing demand in new markets like the Middle East, but the timing and scale of these opportunities remain uncertain, which could lead to revenue projections that fall short of expectations.
  
• The recent project roll-offs and macroeconomic conditions in regions like Latin America could lead to a temporary decrease in revenue growth, affecting the overall financial performance if these conditions persist longer than anticipated.
  
• Although Globant's new AI-driven enterprise solutions are intended to enhance client efficiency, there is a risk that widespread adoption may not occur as quickly as hoped, impacting the company's anticipated revenue from these innovations.
  
• While the company experiences rapid growth in AI-related projects, the increasing competition from other companies investing heavily in AI could pressure Globant's net margins and potentially slow down expected earnings growth.

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 4.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.2% today to 7.0% in 3 years time.
• The bearish analysts expect earnings to reach $195.1 million (and earnings per share of $4.14) by about July 2028, up from $151.3 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 26.1x on those 2028 earnings, down from 26.2x today. This future PE is lower than the current PE for the GB IT industry at 27.6x.
• Analysts expect the number of shares outstanding to grow by 1.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.36%, as per the Simply Wall St company report.

Globant Future Earnings Per Share Growth

Risks

• Globant's heavy investment in AI projects might not yield expected returns if advancements do not translate into increased revenue, which could adversely affect its future financial performance.
  
• The company faces risks from political volatility impacting demand in Latin America, leading to potential revenue fluctuations and contributing to year-over-year contraction in certain regions.
  
• The slowdown in project execution and conversion rates due to macroeconomic uncertainties might result in delayed revenue recognition, thereby impacting the company financial growth forecasts.
  
• The intense competition for pricing on cost-saving projects and the inability to secure significant price increases from clients could pressure net margins, limiting profitability.
  
• Globant's reliance on a few large clients, such as Disney, can create revenue concentration risk if any of these clients reduce their spending with the company.

Valuation

• The assumed bearish price target for Globant is $87.0, 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 $230.0, and the most bearish reporting a price target of just $87.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $195.1 million, and it would be trading on a PE ratio of 26.1x, assuming you use a discount rate of 8.4%.
• Given the current share price of $90.1, the bearish analyst price target of $87.0 is 3.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they 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.