Company Reports

Narrow-moat-rated EPAM reported a disappointing start to 2024, as future demand gets pushed out further, revenue growth expectations for 2024 were downgraded, and the firm now expects additional restructuring charges in the second half of the year as it leans more into efficiency as growth slows. We are lowering our fair value estimate to $209 from $234. While the stock is down 25% in reaction to this quarter’s earnings, we think this is likely overdone, unless the company is stuck at a low-single-digit percentage revenue growth rate indefinitely. The expected effect on 2024 earnings is negative, but manageable, and longer term, we still expect an uptick in demand for the types of IT consulting services that EPAM provides, particularly as more AI-related capabilities and workflows are required by clients. We are still looking for a return to double-digit percentage revenue growth in 2025 and mid- to high-single-digit percentage growth thereafter.

EPAM Systems is a moaty IT services firm, in our view, that has ample runway for solid growth and moderate margin expansion ahead. The firm sets itself apart from companies like Accenture or Tata Consultancy Services with its deep concentration in engineering services, which pertains to the creation of custom enterprise software or code. The demand for engineering services has accelerated since the COVID-19 pandemic, which shed light on the need for an agile and flexible information technology landscape – enabled by custom software. Yet, we think demand for such services is here to stay, as digital transformation projects require hefty software engineering to lift systems to the cloud and finetuning thereafter is inevitable. Altogether, EPAM’s bread and butter of engineering services is a more discretionary type of IT enterprise spending, which means its mix has proved extremely favorable in good macroeconomic times but compounded vulnerability in weaker macroeconomic times. While near-term revenue growth has been challenged, we think the long-term trajectory is solid, and we are pleased to see a focus on increasing consulting revenues which can further drive demand in EPAM’s engineering services.

Narrow-moat-rated EPAM reported solid fourth-quarter earnings, with a slight beat on revenue, 2% higher than both our own estimates and FactSet consensus, while adjusted EPS came in 9% above consensus and 8% above our own estimates. While near-term results were ahead of expectations, EPAM’s outlook for 2024 was mixed. As we push out the eventual recovery in revenue growth and margins that we still expect for EPAM—while also balancing that with some other adjustments to our projections, including slightly lower investment spending to achieve that growth—we are raising our fair value estimate to $234 per share from $222. We still view shares as overvalued.

EPAM Systems is a moaty IT services firm, in our view, that has ample runway for solid growth and moderate margin expansion ahead. The firm sets itself apart from companies like Accenture or Tata Consultancy Services with its deep concentration in engineering services, which pertains to the creation of custom enterprise software or code. The demand for engineering services has accelerated since the COVID-19 pandemic, which shed light on the need for an agile and flexible information technology landscape – enabled by custom software. Yet, we think demand for such services is here to stay, as digital transformation projects require hefty software engineering to lift systems to the cloud and finetuning thereafter is inevitable. Altogether, EPAM’s bread and butter of engineering services is a more discretionary type of IT enterprise spending, which means its mix has proved extremely favorable in good macroeconomic times but compounded vulnerability in weaker macroeconomic times. While near-term revenue growth has been challenged, we think the long-term trajectory is solid, and we are pleased to see a focus on increasing consulting revenues which can further drive demand in EPAM’s engineering services.

EPAM Systems is a moaty IT services firm, in our view, that has ample runway for solid growth and moderate margin expansion ahead. The firm sets itself apart from companies like Accenture or Tata Consultancy Services with its deep concentration in engineering services, which pertains to the creation of custom enterprise software or code. The demand for engineering services has accelerated since the COVID-19 pandemic, which shed light on the need for an agile and flexible information technology landscape – enabled by custom software. Yet, we think demand for such services is here to stay, as digital transformation projects require hefty software engineering to lift systems to the cloud and finetuning thereafter is inevitable. Altogether, EPAM’s bread and butter of engineering services is a more discretionary type of IT enterprise spending, which means its mix has proved extremely favorable in good macroeconomic times but compounded vulnerability in weaker macroeconomic times. Nonetheless, we think their long-term trajectory is solid, and we are pleased to see a focus on increasing consulting revenues which can further drive demand in EPAM’s engineering services.

We have initiated coverage on EPAM Systems with a $222 fair value estimate and a narrow moat rating. The IT services firm sets itself apart from companies like Accenture or Tata Consultancy Services with its deep concentration in engineering services – which pertains to the creation of custom enterprise software or code. The demand for engineering services has accelerated since the COVID-19 pandemic, which shed light on the need for an agile and flexible IT landscape – enabled by custom software. Yet, we think demand for such services is here to stay, as digital transformation projects require hefty software engineering to lift systems to the cloud and finetuning thereafter is inevitable. Altogether, EPAM’s bread and butter of engineering services is a more discretionary type of IT enterprise spend, which means its mix has proved extremely favorable in good macroeconomic times but compounded vulnerability in weaker macroeconomic times. Nonetheless, we think their long-term trajectory is solid and we are pleased to see a focus on increasing consulting revenues which can further drive demand in EPAM’s engineering services.