Leveraging Gen AI And Sustainable Tech Solutions For Market-Leading Growth And Diversification

Key Takeaways

• Generative AI and expansion into marketing technology signal strong potential for revenue growth and operational efficiency improvements.
  
• Investment in sustainable technologies and development of vertical-specific AI solutions align with ESG trends and open new revenue streams.
  
• Geopolitical tensions, currency fluctuations, reliance on large deals, need for significant tech investment, and talent management challenges are key risks impacting revenue and profitability.

Catalysts

Provides technology services worldwide.

• Generative AI (gen AI) presents a massive opportunity for growth, as evidenced by AI-related revenues growing close to 130% in the first half of 2024 compared to the same period last year, signaling a potential positive impact on revenue growth.
  
• The launch of Globant's own AI agents to enhance the software development life cycle, leveraging years of investment in AI platforms, is expected to accelerate development processes and improve productivity, potentially enhancing profit margins through operational efficiencies.
  
• Expansion into the marketing technology space and the creation of the Globant GUT Network, combining advertising organizations with a creative agency, aims at offering comprehensive marketing solutions, indicating potential for growth in revenue from new and existing market segments.
  
• Strong focus on developing vertical-specific AI solutions, as demonstrated by partnerships with leading companies in healthcare, research, and SAP migrations, suggests potential for new client acquisition and deeper penetration into high-value sectors, contributing to revenue diversification and growth.
  
• The investment in sustainable technology solutions, such as the technologies that analyze environmental impacts in corporate decisions, aligns with growing ESG (Environmental, Social, and Governance) trends, potentially opening up new revenue streams and enhancing the company’s market positioning.

Assumptions

• Analysts are assuming Globant's revenue will grow by 16.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.4% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $301.8 million (and earnings per share of $6.36) by about August 2027, up from $168.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $342.3 million in earnings, and the most bearish expecting $212.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.8x on those 2027 earnings, down from 51.9x today. This future PE is greater than the current PE for the GB IT industry at 34.1x.
• Analysts expect the number of shares outstanding to grow by 2.07% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

Risks

• Geopolitical tensions and economic uncertainties, as mentioned, could affect client spending and delay projects, potentially impacting revenue growth.
  
• Currency fluctuations in key markets like Colombia, Mexico, and Brazil may lead to further FX headwinds, affecting reported financial results in USD terms.
  
• The reliance on large deals for growth, especially in Europe and the Middle East, introduces execution and client concentration risks, potentially impacting revenue stability.
  
• The ongoing need for significant investment in AI and new technologies to maintain a competitive edge could pressure profitability margins if these investments do not yield the expected revenue growth.
  
• The talent management challenge, including the need to continuously hire and retain top talent amidst competitive pressures and potential increases in attrition rates, could impact service delivery and operational costs.

Valuation

• The analysts have a consensus price target of $223.0 for Globant based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $255.0, and the most bearish reporting a price target of just $140.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.6 billion, earnings will come to $301.8 million, and it would be trading on a PE ratio of 40.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $203.19, the analyst's price target of $223.0 is 8.9% higher. The relatively low difference between the current share price and the analyst consensus 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.