Stock Globant: Defensible Valuation Approach – Hold (NYSE: GLOB)
We’ve got Globalant covered (NYSE: GLOB) at the end of last year, and in this article, we profiled the company and explained why we thought it was extremely overvalued despite the fact that we liked about it. Since then, stocks have significantly underperformed the market by a factor of more than 2x. In fact, the shares have almost halved, so we thought it might be time to revisit the company and see if the overvaluation has been corrected.
One of the reasons the stock has become so expensive is because investors are excited about the huge addressable market the company is targeting. While we agree that this TAM is huge, there are plenty of companies competing for it, and we don’t see the company having a particularly strong competitive moat that would allow it to capture the majority of these markets.
We have to give the company credit, its revenue growth has been nothing short of impressive, and it has even accelerated in recent years.
Also impressive, it has been profitable growth, with the company posting very decent and stable profit margins.
That said, these are the profit margins and returns on invested capital of a relatively normal business. If Globant had a strong competitive moat, we would expect much higher gross profit margins and much higher returns on invested capital.
Since its IPO, Globant has recorded an average growth of around 31%, and it has accelerated recently, as shown in the chart below. The big question for us is how much longer Globant can sustain this level of growth, as competition is likely to intensify and we see no particular competitive advantage that would favor the company over the competition. Globant appears to be a very successful operator, but this is not enough for it to capture most of the growth in its markets.
Globant has a very strong balance sheet, with approximately $373 million in cash and short-term investments, and very little long-term debt.
We like that Globant has a strong ESG approach and seems to treat its employees well, judging by the company’s very high Glassdoor rating and the high percentage of employees willing to recommend the company to a friend and endorse the CEO. .
Another reason we fear growth rates are starting to drop is that Globant is no longer a startup, but a company with a market cap of $8 billion and revenue of nearly $1.5 billion. billion dollars. There’s no rule that says a big company has to grow at a slower rate, but it does mean that it has to win a lot more contracts or a lot bigger contracts to maintain the same level of growth.
Either way, it’s good to see that the valuation has become more reasonable, with EV/Revenue at ~5.4x, after hitting an extremely expensive multiple of 13x.
EV/EBITDA also declined and now stands at ~42x for the last twelve months and at ~21x for the forward multiple. A multiple of 21x is certainly starting to look a lot more reasonable, especially compared to the triple digits it was hitting before. It is thanks to a combination of improving fundamentals and declining share price that the valuation has readjusted so quickly.
Forward P/E stands at ~38x, which doesn’t sound like a bargain, but may be justified by the company’s growth.
To get a better idea of whether the stock is still overvalued, we made an estimate of the stock’s net present value, which came up at $193, which is very close to where the stock is currently trading. The assumptions we used were average earnings estimates for the next three years, as compiled by Seeking Alpha, and 15% growth thereafter through 2032. We then used a terminal growth rate of 3 % similar to GDP and discounted by 10%. Probably the most controversial figure is the 15% growth rate after 2024, with some investors probably thinking it’s too conservative, and others believing we shouldn’t expect such a high growth rate for so many years. . We decided to use 15% because this is half of the company’s average revenue growth over the past ten years. So we wanted to see what a reasonable valuation would be if the company grew at half the speed of the previous decade.
|PES||Discount @ 10%|
|AF 32 E||25.51||8.94|
|Terminal value @ 3% terminal growth||364.46||116.13|
We believe the business has benefited from a huge tailwind due to currency weakness in emerging market economies, such as Latin American countries, where most of the business’ costs and headcount are located. , and the strength of the currency in which it receives most of its revenue, primarily in US dollars. If this trend reverses, it could instead become a headwind and make the company less competitive.
Another risk we see for the company is that of increased competition, as it operates in large markets which are likely to attract more and more competition, especially as the size of the market increases. .
After a significant drop in share price and continued improvement in fundamentals at Globant, we no longer believe the stock is absurdly overvalued as we believe. We believe that the current share price can be justified, but there remains a high level of uncertainty, as it is difficult to estimate the company’s growth rate for the next few years. We believe that at least going forward, investors should see returns more in line with corporate fundamentals, now that stocks are trading at a more reasonable valuation.