Endava PLC - ADR

Endava (DAVA) is an IT services provider that the market currently perceives as an AI loser. However, we believe that the lower costs associated with AI will enable different kinds of IT projects for DAVA’s customers, potentially compensating for lower prices per project with higher volumes. We anticipate that 2026 will be the year when Endava returns to growth, despite recent underperformance due to execution issues. The company trades at 0.3x sales, significantly lower than its peers, and we estimate normalized Net Income margins around 10%, suggesting a P/E of approximately 3x once the business stabilizes.

I purchased shares in Endava (DAVA) again based on a number of factors: 1) Endava operating margins are at trough levels, 5-10 percentage points below peers, despite being at parity in the past; 2) all-time low valuation <10x P/E without adjusting for the trough margins; 3) peak pessimism from the market about disruption from AI at the same time AI developments on the ground have actually slowed down, and 4) customer-specific delays at a major customer that have hampered growth relative to peers. There is a lot of pessimism baked into the price of this business and I believe there is a self-help story here that either management or a bidder will ultimately seek to realize.

We are still not convinced that these businesses are fundamentally challenged. The market believes that these businesses - that help other businesses implement technology solutions - are challenged in an era of Artificial Intelligence (AI). While we anticipate deflation in per-project revenue, the overall volume of projects is likely to increase, leading to higher overall revenues for companies like Endava. We believe that IT services businesses benefit in this environment as the competitive landscape demands continuous technology investments leading to higher IT budgets.