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Gartner: A Reasonably Valued Tech Giant

The outlook is bright for the research and advisory company

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Jan 20, 2022
Summary
  • Barron's named Gartner a top tech stock for 2021.
  • The company has recovered well from its recession woes.
  • Gartner seems reasonably valued in the market.
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Based in Stamford, Connecticut., Gartner Inc. (

IT, Financial) provides timely, stimulating, comprehensive and independent research and analysis on information technology and other related industries. Its research is delivered to clients via published reports, briefings, interactive tools and facilitated peer networking events.

Typical clients of the company include chief information officers and other business executives who help plan companies' IT budgets. The company is known for its high-quality services, and its research reports have become indispensable tools for various companies across different sectors, which has strengthened its leading position in the market. The company's client base consists of a large chunk of small-volume customers which has led to reduced business risk. Gartner’s operating segments include research, conferences and consulting.

The research segment serves as the backbone of Gartner, generating the lion’s share of total revenue and regularly accounting for nearly 85% of annual revenue. The consulting segment offers fact-based consulting services to help optimize the business performance of clients through its distinctive research insights, benchmarking data and problem-solving methodologies. This segment generally accounts for close to 10% of company revenue. The events segment, which was renamed as conferences, accounts for less than 5% of revenue.

Gartner among top tech stocks for 2021

Last year, the research and consulting arms of Gartner returned to pre-pandemic levels, and this impressive financial performance lifted Gartner's stock to new highs in 2021 as well. The company reported better-than-expected earnings and revenue in each of the last eight quarters as well, which was also one of the main reasons that led to increased optimism among investors.

Barron’s ranked Gartner among the top 20 best tech stocks for 2021. Some of the other companies that were included in this list are Fortinet Inc. (

FTNT, Financial) and Nvidia Corp. (NVDA, Financial).

With new challenges looming due to the Covid-19 recession, Gartner facilitated many companies to strengthen and maintain their leading position in the market. Gartner is equipped with unique data assets and deep domain expertise to provide insights and decision support solutions, which have been indispensable tools for its customers over the last couple of years.

At the beginning of 2017, Gartner acquired CEB Incorporation, an industrial leader in providing best practice and talent management insights. This deal added to Gartner’s market strength in offering a comprehensive and differentiated suite of services across the globe.

However, Gartner faces stiff competition from other players in the market as the industry of consulting services has low barriers to entry. There is a significant number of independent providers of consultancy services and information products and services such as Accenture PLC (

ACN, Financial), Bureau Veritas Registre International De Classific, CBIZ, Charles River Associates and Information Services Group. Because of this competition, Gartner should need to continuously invest in its products and technology, which is likely to keep operating margins under pressure in the coming years.

Earnings recap

Gartner reported better-than-expected earnings and revenue for the third quarter of 2021. The company reported revenue of $1.2 billion, up 20.6% year-over-year and ahead of the Wall Street consensus forecast of $1.14 billion. On a currency-adjusted basis, revenue was up 15%.

Under GAAP measures, the company earned $149 million, or $1.76 per share. Although Gartner’s conference business continued to face difficulties in the quarter, the research and consulting businesses returned to pre-pandemic levels. The company switched to virtual events during the pandemic and plans to return to live events in 2022.

The balance sheet looks healthy with an encouraging liquidity position. The company ended the third quarter with cash and cash equivalents of $766 million, and the company is in a good position to honor its short-term debt repayment commitments.

Gartner’s share buybacks have contributed to instilling investor confidence and have positively impacted earnings per share as well. In 2020, Gartner repurchased 1.2 million shares for $176.3 million, and it resumed buybacks in 2021 after slowing down the pace of stock repurchases in 2020 at the height of economic uncertainty.

The outlook is positive

Gartner raised its full-year 2021 revenue forecast to $4.66 billion from $4.57 billion based on the strengthening outlook for the global economy. The company boosted its full-year earnings per share forecast to $8.54 from $7.60 as well.

The management consulting industry experienced an estimated 6.3% revenue contraction in 2020 due to pandemic-related challenges. Non-discretionary projects around risk and regulation, digital transformation and other technology helped the industry survive in 2020 and early 2021, but today, industry conditions have normalized and a full recovery is on the cards for 2022.

Valuation

The increasingly complex nature of business transformation and the continued recovery of the global economy are likely to be drivers of revenue for Gartner in the next few years. The company is valued at a forward price-earnings ratio of 32.28 today based on analysts' estimates for future earnings, which I believe is reasonable for a profitable tech company with bright growth prospects.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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