Billionaire Bets $288 Million On Under-the-Radar Stock

In a world of constant change, businesses are on a quest to successfully adapt and grow in the ever-evolving landscape of societal norms and emerging technologies.

Indeed, leading the way through this complex transition is EPAM Systems (NYSE:EPAM), a global powerhouse in software engineering and digital platform services.

Established in 1993, EPAM has made a significant mark as a premier software development company. Operating from its headquarters in Pennsylvania, the venture has extended its global footprint, helping organizations address the twin challenges of digital and social transformation.

Likewise, the company’s suite of applications is diverse and wide-ranging. From consulting and technology to strategy, design, and optimization, EPAM offers a raft of end-to-end solutions. The firm prides itself on its unique ability to integrate all these elements to deliver outcomes that are not just technologically superior but also socially relevant.

However, what’s especially notable is the interest that EPAM has garnered from billionaire investor Stephen Mandel. In a public show of support for the business, Mandel’s management firm, Lone Pine Capital, recently plowed $288 million of his $10.8 billion fund into the enterprise.

Regrettably, the outbreak of war in Ukraine inflicted severe damage on EPAM Systems, as numerous “employees and their families” were situated in the affected area. As a result, the company’s stock price has plummeted by almost 50% since February 2022, displaying minimal signs of recovering from this downturn.

So, did Lone Pine Capital jump the gun on an outfit that’s in terminal decline? Or is EPAM a great stock flying under the wider market’s radar?

Ratings Downgrade

In contrast to Mandel’s confidence in the firm, even a cursory glance at the financial health of EPAM Systems paints something of a somber picture.

For instance, while the first quarter of 2023 generated year-on-year earnings growth of 3.4% at $1.211 billion, this, in fact, represented a sequential decrease of 1.6% from the $1.231 billion it made in the fourth. The board’s predictions for the upcoming Q2 also imply a persistent continuation of this negative tendency, with anticipated earnings ranging from $1.195 billion to $1.205 billion.

Moreover, a major obstacle that hinders possible revenue expansion is the downsizing of the enterprise’s workforce. For the period ended March 31, 2023, EPAM had 57,450 workers, which decreased from 59,250 at the close of 2022.

With fewer staff members contributing their skills, it becomes much harder to rejuvenate revenues beyond the projected range. This is never more true than in the IT services sector, where the capacity for sales growth is strongly tied to the number of employees at a company’s disposal. Hiring new people, training them, and integrating them into billable roles is a time-intensive process; therefore, a growing headcount is almost synonymous with revenue growth in the industry.

Looking ahead, EPAM has revised its full-year revenue forecast for 2023, projecting just $4.950 billion to $5.000 billion, a marginal increase from 2022’s revenue of $4.825 billion. This is a far cry from the previously projected figure of at least $5.250 billion announced in February, marking a somewhat bleak turning point.

EPAM Still Has A Significant Opportunity To Exploit

The enterprise IT industry presents a sizeable and ever-growing total addressable market. The extensive magnitude of the industry is underscored by Gartner’s latest prediction, which estimates that global IT spending will attain a remarkable $4.6 trillion in 2023. This amount symbolizes a 5.1% surge from the preceding year, emphasizing the market’s steady growth.

Despite economic uncertainties and disruptions, enterprise IT spending has proven to be rather resilient. This durability is largely due to the strategic decisions of company leaders, with CEOs and CFOs choosing to increase their spending on digital business initiatives even in challenging times.

Diverging from the customary strategy of reducing IT budgets during economic turmoil, corporations recognize the benefits of pouring resources into their digital infrastructure to maneuver through and potentially profit from the instability.

This shift in spending is highlighted by the projected growth rates of different IT sectors in 2023. Specifically, software spending is expected to grow by 11.3%, starkly contrasting the anticipated stagnation in other domains. This reflects businesses’ evolving needs and priorities, with many focusing on software and cloud-based solutions over hardware purchases​.

For potential investors in EPAM Systems, understanding these industry trends is crucial. EPAM operates within the software product development and digital platform engineering services segment of the enterprise IT industry, making it well-positioned to benefit from the projected growth in software spending​​.

Indeed, the increasing investment in digital technologies aligns well with EPAM’s business model. Companies across various sectors are leveraging digital technologies not just for operational efficiency but also to reshape their revenue streams, introduce new products and services, and modify the value propositions of their existing offerings.

This shift drives the transition from purchasing off-the-shelf technology solutions to building, composing, and assembling tailored technology to meet specific business needs. This trend is particularly significant as it underpins the growing preference for cloud-based solutions over on-premises systems for new IT spending​​.

In light of this, EPAM’s strategic focus on software product development is a response to – and capitalization on – the evolving needs of the enterprise IT market. Indeed, according to its own estimates, EPAM believes its total addressable market could reach a massive $1.8 trillion in 2026 alone.

EPAM: Has Stephen Mandel Made The Right Call?

The enduring shift fundamentally remolding the global enterprise IT landscape is undoubtedly digital transformation, which is not simply a temporary, fleeting fad. As various industries endeavor to update their operations, digital solutions have become an essential element of their strategic blueprints. As a result, EPAM’s services are in high demand, propelling it to be a crucial growth catalyst in the enterprise IT industry.

Given its depressed stock valuation at the moment, the company trades at a discounted forward PE multiple of 22.1x. To put this into context, two of EPAM’s main rivals, Accenture plc and Globant S.A., are changing hands for 27.7x and 32.1x their respective future earnings.

So, if you like your investments cheap and with plenty of room to grow, following Lone Pine’s lead might just be the way to go.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.