EPAM Systems Inc

EPAM Systems has a resilient underlying business and a net-cash balance sheet, despite its stock de-rating to approximately 4x EV/EBITDA and 7x P/E. The current challenge in IT services is the rapid evolution of AI, causing enterprises to delay digital transformation projects. However, this is viewed as a timing issue rather than a structural one. As AI capabilities advance, the demand for sophisticated engineering will increase, and EPAM's decades of experience in building forward-deployed engineering teams positions it well. The value of trusted engineering partners like EPAM is expected to rise in an AI-driven world, enhancing its competitive advantage.

EPAM Systems (EPAM) is an engineering-driven IT services firm that sits at the critical intersection of enterprise technology and real-world implementation. It was deemed as an AI loser but the market is slowly realizing that many corporations are still not on the cloud, core systems will need to be modernized before AI is deployed, and EPAM can incorporate AI and productivity into its delivery organization. EPAM is currently trading at 11x EBITDA and 17x EPS based on this year’s estimates. We expect EPAM to grow revenues in the mid-teens and earnings in the high-teens over the next several years. If the company executes on that trajectory, the share price should broadly track earnings growth over time.

EPAM is mentioned as one of the top positions in the portfolio, but the letter indicates that it, along with Endava, was a drag on performance this year. The manager reflects on their thesis regarding IT services companies and notes that without EPAM and Endava, the portfolio would have performed significantly better. However, there is no explicit bullish or bearish argument made about EPAM's future prospects or performance.

The big detractors remain our IT service holdings - EPAM Systems (EPAM) and Endava (DAVA). On a year to date (YTD) basis, these two positions have detracted close to 700 bps or 7% from performance! It has indeed been painful! However, we are still not convinced that these businesses are fundamentally challenged. We have previously written about market worries regarding these businesses and our variant perception. To summarize, the market believes that these businesses - that help other businesses implement technology solutions - are challenged in an era of Artificial Intelligence (AI). We do not disagree with this premise. We wholeheartedly embrace the premise that AI will deliver profound productivity benefits and fundamentally transform many aspects of our lives.