Is Endava Stock a Steal?

It’s not uncommon to see a company suffer significant share price volatility despite its business demonstrating otherwise sound underlying fundamentals. Indeed, inflationary pressures, market sentiment, and global economic uncertainties will constantly challenge investors trying to gauge the actual value of a given enterprise.

 

One venture that has not been immune to these price distortions is the UK-based IT consulting company Endava, whose stock has fallen 46% over the last twelve months.

 

And yet, accounting for the rollercoaster ride it’s been on lately, DAVA’s financial performance has been breathtaking. It’s clocked some remarkable growth metrics recently, such as its annual revenue soaring at a compound annual growth rate of 31.7%, from £217.6 million in FY 2018 to £654.8 million in FY 2022.

 

But beyond the macro fluctuations and market turbulence, Endava possesses many other quivers to its operational bow.

 

Let’s delve into the company’s imposing track record and examine the unique strengths that position this exciting venture for future success.

 

 

While Endava’s positive sales momentum is pleasing in its own right, there’s plenty more to commend this company from a commercial point of view.

 

To begin with, the firm’s free cash flow has experienced explosive growth over the past two years, surging a massive 240% to reach a total of £107.2 million during FY 2022.

 

Moreover, the number of DAVA’s clients with revenue above £1 million on a twelve-month rolling basis has also increased by 31% to 155.

 

In fact, both the average spend of Endava’s top 10 clients and its remaining customer base have also witnessed substantial year-on-year expansion.

For example, the average spend of the highest-earning clients has increased by 17%, while the remaining customers have shown an 11% uptick. These figures indicate the company’s ability to deepen its relationships with existing clients and leverage its expertise to deliver additional value.

 

Interestingly, at 53% of its total sales, Endava’s revenue share by vertical is skewed toward the payments and financial services industries – which is a boon since these are considered growth sectors that will continue to contribute to the firm’s coffers over time.

 

Perhaps most crucially, however, is the fact that DAVA’s bottom line is improving too. Reflecting its ability to generate sustainable and healthy returns, the corporation’s adjusted profit before tax over the last three quarters has risen by 23% year-on-year, resulting in a margin of 20.8%.

 

With its founder-led management team and strong, confident culture, Endava is well-positioned to capitalize on the immense opportunities within the IT technology space. The firm expects to tap into a sizeable addressable market estimated to reach $3.4 trillion by 2026, showcasing the substantial potential for digital transformation investments over the next five years.

 

Likewise, one of Endava’s key strengths in this respect lies in its global workforce, which has grown by an impressive 6.7% over the past year. With a current global headcount of 11,742 professionals, the company possesses a vast talent pool capable of delivering innovative solutions and addressing complex business challenges across various industries and geographies.

 

In addition to organic growth, Endava leverages strategic “tuck-in” acquisitions to accelerate its expansion. This approach allows the company to establish a presence in new geographical locations or venture into emerging areas of expertise. By carefully integrating these acquisitions, Endava enhances its capabilities and strengthens its dominance in the market, further fueling its growth trajectory.

 

Companies have had to radically transform their businesses to leverage their particular advantages to keep pace with rivals and remain competitive in a rapidly evolving landscape. This strategic shift has empowered traditional enterprises to meet the ever-changing expectations of customers and effectively navigate the digital era.

 

One key aspect of this transformation has been adopting an agile delivery philosophy. Agile delivery is a project management methodology emphasizing flexibility, collaboration, and iterative development. It enables organizations to break down large projects into manageable tasks and adapt their deliverables based on feedback and evolving requirements.

 

Indeed, Endava’s agile delivery system involves working closely with clients to understand their requirements, prioritize features, and deliver software in short, iterative sprint cycles. This approach enables frequent feedback, continuous improvement, and the ability to quickly respond to changing needs and market dynamics.

 

In contrast to the traditional waterfall model – where requirements are defined upfront, and development occurs in sequential phases – Endava embraces an iterative approach instead. This means breaking down projects into smaller increments and delivering working software at the end of each iteration.

 

Agile delivery also provides flexibility and adaptability. Endava can respond effectively to changing requirements, market conditions, and client feedback. This ability to make adjustments and course corrections during the development process ensures that the end result aligns with the evolving needs of the client and the market.

 

After its sustained price drop throughout 2023, it’s no surprise that Endava trades at a substantial discount to its rivals.

 

For example, its forward non-GAAP PE ratio is significantly more attractive than the sector median at 16.9x, while its revenue growth is expected to outstrip the IT industry by more than double in the next couple of years.

 

However, DAVA really shines when it comes to profitability. The firm’s net income margin is stellar at 12.5%, not least compared to its peers’ paltry 1.97%. Moreover, its 13.9% return on common equity is exceptional, partly reflecting its low capital expenditures, which came to just 2.1% of revenue in 2022.

 

With other superb indicators, such as its growing customer spend and rising cash flows, Endava stock looks to be a cheap bet on a fantastic business.

 

Endava presents an intriguing investment opportunity despite the challenging macro environment. The company’s strong fundamentals, including consistent revenue growth and expanding profit margins, showcase its ability to navigate difficult situations.

 

With its deep expertise in high-demand areas and a focus on digital transformation, Endava is ready to capitalize on the massive market in front of it. The introduction of agile delivery further enhances this competitive edge.

 

While short-term volatility may persist, Endava’s solid financial metrics and favorable valuation make it attractive for investors seeking long-term rewards in the IT services sector.

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