Globant is trading at a very high valuation, and waiting for 20-30% drop before buying.
Globant (NYSE:GLOB) is an Argentinian-based IT outsourcing company highly focused on digital transformations for enterprises across the world. Globant is a truly international corporation with 56 offices across 36 cities, and spanning 16 countries across the world. The workforce is quickly becoming highly diversified shifting from 69% of workforce based in Argentina in 2014 to 30% as of September 2019.
Globant is focused on a number of digital transformations with competencies in Artificial Intelligence, Screenless UX, augmented reality, virtual reality, and connected ubiquitous experiences. Digital and Cognitive transformations are quickly becoming a necessity for any enterprise as the rate of technology innovation continues to increase and is mandatory for companies to stay competitive. Globant is addressing large and quickly growing markets. Artificial Intelligence is expected alone to grow to a $60 Billion market by 2022, representing a 60% CAGR. Digital Services is expected to grow to $154.4 Billion market by 2022, representing a 19.2% CAGR (Investor Presentation).
The competitive landscape is largely focused on 2 main categories. Pure play digital transformation companies include Globant, EPAM Systems (EPAM), and to a lesser extent Accenture (ACN). The other main strategy has been low cost cheap labor options offered by Tata Consultancy (OTCPK:TTNQY), Infosys (INFY), and Wipro (WIT). Cognizant (CTSH) sits somewhat in the middle where they are doing the best, making the transition from low cost option into a digital transformation IT company. The trend seems to be clear where the customers' preferences have shifted to high end consultancy services offering digital transformation.
Growth rates for EPAM, Globant, and Accenture have far surpassed the growth rates of their low cost peers, with Accenture showing lower outperformance due to massive size. EPAM and Globant seem to have a much more strategic relationship with their top customers as they bring digital transformation expertise that helps their clients increase their relationship, retention, and revenue generated by the end customers. This seems to be a much sticker relationship and appears to be a main determinant for better organic growth and profitability. I anticipate more IT outsourcing dollars to flow to companies able to bring expertise to AI, cutting edge apps, blockchain based solutions, and cutting edge encryption methods.
Globant is founder-led, being founded by Martin Migoya, Guibert Englebienne, Martin Umaran, and Nestor Nocetti in 2003. All of the four founders of the company are currently still at the company in senior management roles after 16 years. I strongly prefer to invest in founder-led companies when possible as the commitment to the company and knowledge of the company is typically far superior to companies with a revolving door leadership. Migoya is a well-respected CEO with a 91% approval rating on Glassdoor. Globant has an overall rating of 3.9 from employees and an 84% rate of recommending to a friend.
I like to invest in companies with strong CEO approval, company ratings, and recommendation rates as it helps to retain high end IT employees in a very competitive market. Focusing on investing with founders who are completely devoted to a company and have strong support from employees are a couple of my favorite overlooked factors when looking at new investment opportunities.
Globant's leadership in digital transformation has shown up in strong revenue growth. Revenue has increased from $200 Million in 2014 to $522 Million in 2018, representing a 27.2% CAGR. Sticky relationships with top customers have caused revenue to grow from their top 10 customers from $8.8 Million to $23 Million. Top 20 customers have seen a similar trend moving from $6.1 Million to $15.1 Million. Strong stickiness is also exemplified by Globant growing $1 Million accounts from 46 in 2014 to 104 YTD. The strategic nature of Globant's offerings and relationship should bode well for a continued ability to increase revenue per customer and grow the number of large strategic accounts.
Globant has managed to very profitably grow their bottom line. Adjusted Net Income has rapidly grown from $24 Million in 2014 to $64 Million in 2018. This represents growth of 166% over the four-year period. Adjusted profit from operations has grown from $21 Million to $84 Million over the same period, representing growth of 300%. Adjusted profit has drastically improved from 10.6% of revenue in 2014 to 17.2% year to date. This increase margin profile is bolstered by dropping SG&A costs from 26.3% of revenue in 2014 to 20% in 2018 and has decreased each year of this period. I believe this can continue to act as a tailwind for further operating margin expansion (Investor Presentation).
Rapidly increasing growth in revenue has pushed for an ever-increasing overall headcount. Increasingly new employees have been coming from Columbia and Mexico which are respectively up from 8% to 27% and 4% to 11% from 2014 to 2019. Globant is highly reliant on South America for their IT talent, with 70% of their workforce being from South America. Management has opened new offices in Romania, Spain, Belarus, and the UK to diversify their options for new talent.
Globant looks quite expensive on most every metric currently. GLOB is trading at 38.96x forward EPS, 4.86x forward sales, and 29.92 forward EV/ EBITDA (Seeking Alpha). Earnings are growing quickly with operating margin expanding, but still leave forward EPS at a highly elevated level. 5 times sales seems the most reasonable metric for a company with 27.2% CAGR. Sales multiple is a low quality metric in my opinion, and the more important EPS/ EBITDA metric looks far too rich for an investment now. Globant is one of many high quality names in the market that are priced for perfection. I would be a buy and hold investor in Globant with a 20-30% drop in share price to create a better margin of safety.
Globant is a dynamic pure play digital transformation company focused on AI, cutting edge apps, blockchain based solutions, and cutting edge encryption solutions. Providing industry-leading solutions has created very sticky customer base, causing expanding spend in top 10, top 20, and a large increase in $1+ Million accounts. Globant has generated 91% of its revenue from existing customers showing a very high customer retention.
Growth in Artificial Intelligence and Digital Services provides a strong tailwind for Globant to increase penetration with existing top 20 customers, grow newer customers, and acquire new clients needing a specialist to guide their digital transformation. Strong revenue growth, profitability, increasing margins, sticky customer base, and industry tailwinds make me believe that Globant will be offering significant alpha to the market for long-term investors. The growth story for GLOB is very similar to EPAM Systems, which is another company that I have covered, making me immediately gravitate towards GLOB. Valuation is over-extended in my opinion, and I will await a 20-30% drop before acquiring shares.