EPAM Systems (EPAM, Financial) is one of the world's largest custom software and consulting providers. The company was founded in 1993 and had their IPO in 2012. Since then the stock has generated tremendous returns for investors overall, but it recently saw a dramatic pullback of 71% after blowing up into a bubble in 2020 and 2021.
Business model
EPAM Systems specializes in digital product design and a variety of other business services, including business model innovation, brand marketing, customer experience transformation and more. They are the go-to player for helping companies with their digital transformation and providing solutions, not just services. Their process is to “Consult, Design, Engineer, Operate and Optimize."
Their customers include 67 of the Fortune 100 and major organizations across a range of industries from financial services to travel. Its customers include Southwest Airlines (LUV, Financial), Epic Games, UBS Group (UBS, Financial), Moneysupermarket (LSE:MONY, Financial), Vue Cinemas and many more. They currently employ an army of technologists equating to over 61,600 globally.
According to EPAM’s investor presentation, they are attacking a $1 trillion total addressable market across enterprise IT services:
On EPAM’s factsheet, I noticed a large concentration of employees in the Baltic region. With ~36% of its business from Ukraine (12,389) and Russia (8,933), this could be a risk moving forward given the conflict in the region. However, as the company generally provides consulting services, these workers should be able to operate remotely from safe locations should the conflict continue. That's not to say it won't negatively affect business, but personally, I believe the selloff is overblown.
Financials
EPAM's most recent earnings report was for the first quarter of 2022. Revenue increased to $1.17 billion, up 50% year-over-year. This was split across the following industry segments:
- Travel and consumer ($265 million) - 22.6%
- Financial services ($260 million) - 22.2%
- Business information and media ($194 million) - 16.6%
- Software and high tech ($189 million) - 16.2%
- Life sciences and health care ($124 million) -10.6%
- Emerging verticals ($139 million) - 11.8%
They operate with a steady gross margin of 33%, which would be expected for a service-based business. Their operating margin is approximately 11%. They invest approximately 20% of their revenues into selling, general and administrative expenses.
EPAM generated free cash flow of $468 million for the full year of 2021, but the first quarter showed free cash flow of -$75 million.
EPAM has a fortress-like balance sheet with $1.2 billion in cash and cash equivalents. They have just $16 million in current debt and $30 million in long-term debt.
Valuation
In terms of valuation, EPAM trades at an enterprise-value-to-Ebitda ratio of 26, which is at the low end relative to historic levels.
The company trades at a price-earnings ratio of 42. This is higher than competitors such as Accenture (ACN, Financial) with a price-earnings ratio of 30 and Infosys (INFY, Financial) which trades at a price-earnings ratio of 27.
The GF Value line, a unique intrinsic value estimate from GuruFocus, indicates the stock is significantly undervalued at the time of writing.
EPAM is poised to ride the wave of digital transformation, and their rapid revenue growth is proof of concept that their services are in demand. The stock price has recently pulled back, which believe makes it a great pick for growth at a reasonable price.
