GLOBANT S.A. (Ticker: GLOB) LBIRLBIRLBIR Recommendation Recommendationrecommendation
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STOCK: GLOB | 2/25/21 FIRST FOCUS GLOBANT S.A. (Ticker: GLOB) LBIRLBIRLBIR Recommendation RecommendationRecommendation Stock Price: $222.57 (02/24/21) Company Size: $8.80B Author: Vineet Begwani Company Rank: 220 Sector: Information Technology Industry: IT Software and Services Globant is a digitally native technology services company that delivers digital and cognitive transformations for businesses. IN THIS FIRST FOCUS WE’LL COVER: Summary of the Business Globant provides outsourced IT professional Grab-and-Go services and software solutions to a number of THESIS business organizations to help them on their digital transformation journeys. An investment in Globant is a play on Recent Developments the growing need for digital The company delivered strong 4Q20 financial results transformation of businesses. The and provided a robust growth outlook for 2021. company is a leading IT professional services company that focuses on Competitive Environment helping businesses on their digital Operates in an intensely competitive market, but transformation journeys. Its differentiates itself as a pure play digital and continued success largely depends on cognitive transformations provider. The market is its ability to optimally manage its large enough for multiple players to grow. professional headcount to meet the Conclusions/Recommendations accelerated and on-going demand for Although the stock’s valuation at 10.9x TTM P/S is more digital engagements from both rich, we expect Globant to maintain a robust existing and new clients. profitable growth trajectory as it benefits from its strong client relationships and the growing spend of businesses on digital transformations. We assign Globant a “GREEN LIGHT” rating. SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 1 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS Data as of 02/24/21 unless specified Revenue Fwd $1.47B Enterprise Value: $8.56B Market Cap: $8.80B (TTM): ($814.1M) Fwd (TTM) 6.0x YTD Return: 5.8% RSI: 51.69 Price/Sales: (10.9x) Gross Margin Revenue Growth 37.4% 23.5% ROIC (TTM): 10.0% (TTM): (TTM, YoY): 200-day Moving 52-Week High: $244.72 52-Week Low $70.83 $180.26 Avg. EBITDA $87.0M CFO NA FCF ~$48.0M Insider Transactions: NA As a matter of fact, Globant maintains very close SUMMARY OF BUSINESS relationships with some of its top-tier customers, Globant SA is a Luxembourg based software including the likes of Disney and Google, and has technology services provider that creates focused more on growing within the existing platforms powered by native digital technology client base by leveraging the strong relationships, to deliver digital and cognitive transformations rather than growing the number of customers it for businesses. It provides its services to medium serves. While this has resulted in a relatively and large sized companies, which include lower customer count, which stood at 798 over marquee names such as Disney, Google, the last 12 months, the company has been able to Rockwell Automation, Santander, etc., through increase the number of multi-million-dollar over 16,200 employees (called Globers), including customer accounts rapidly. 15,290 IT professionals, present in 35 cities across 16 countries globally. Despite the global presence, the company derives a large majority of its revenues from North America as its revenues are concentrated with a few clients, primarily in the Banking, Financial Services & Insurance and the Media & Entertainment space in the US. Source: 4Q20 Investor Presentation Globant has also actively pursued strategic acquisitions either to grow into a new geography or to expand its area of specializations. It has acquired 20 companies so far and some of its recent acquisitions include BlueCap, gA, Belatrix, Avanxo, PointSource, Ratio, L4 Digital, etc. This, combined with expansion within existing customers, has resulted in tremendous top-line Source: 4Q20 FactSheet performance over the years. In fact, its revenues SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 2 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS have grown by an impressive 26.4% annually Pod, works directly with customers with a full since 2014. maturity path). The company, however, does not Revenue ($ Millions) yet have a single customer with over $100 million in revenues and its top customer, Disney, brought YoY: 23.5% in $89 million in revenue in 2020. CAGR ('14-'20): 26.4% 814 LB•LOGIC We note that Globant does 659 not yet have a single customer with the 522 targeted revenue of over $100 million 413 2 323 under its 100 strategy. We think the 254 2 200 targets under the 100 strategy are overly ambitious at this time, but will be 2014 2015 2016 2017 2018 2019 2020 encouraged to see a few customers bring in that kind of revenues anytime soon. Source: 4Q20 Investor Presentation LB•LOGIC We are impressed by From a profitability standpoint, Globant Globant’s robust revenue growth generates stable gross margins in the 40% range trajectory over the years, which is a and is also profitable on the operational and net result of a number of strategic income line. It also generates stable free cash acquisitions and its ability to grow the flows and maintains a strong balance sheet with wallet share from its top-tier customer ~$298 million in cash and investments and just base. However, a large chunk of its about ~$26 million in borrowings as at the end of revenues come from a selected set of December 2020. customers, exposing the company to risks inherently associated with a high Total Addressable Market (TAM) level of revenue concentration. ◼ The addressable market opportunity for Globant is large and growing rapidly as businesses are Going forward, Globant plans to continue to seek shifting their priorities toward digital growth via strategic acquisitions, as well as engagement on an ongoing basis. The COVID-19 organically via acquisition of new clients and pandemic has accelerated the shift as businesses expansion within existing clients. For expansion are pushed to transform and adapt to the new within existing clients, Globant has devised a 1002 scenario, and technology has become the key to strategy, whereby it strives to achieve 100 augment their capabilities. accounts, each with potential annual revenues of IDC estimates that by 2022 more than 60.0% of over $100 million. It plans to do this by increasing global GDP may be digitized, with growth in the number of projects, cross-selling and every industry driven by digitally enhanced penetrating deeper within customers through its offerings, operations and relationships and about Agile Pod model (under the model, a team, or SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 3 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS $7.0 trillion will be spent on information technology through 2022. While IDC pegs the global spending on digital transformation technologies and services at $1.3 trillion in 2020, according to a recent report by Morgan Stanley, the global spending on digital transformation projects is projected to grow at a CAGR of 21% to $879 billion in 2025 from $337 billion in 2020. Source: 4Q20 Investor Presentation LB•LOGIC Globant’s addressable The agile podular structure eliminates the need market opportunity is significantly large for command-and-control methods. This and growing rapidly as businesses shift provides teams full independence in customer their priorities toward digital interaction, while being fully accountable for engagement on an ongoing basis. This service delivery. This ensures high service quality provides it a significant runway to and enhanced value to clients. continue its strong growth trajectory in the future. ◼ Special/Unique Characteristics of the Company As opposed to the traditional IT service models, Globant has a unique service delivery model, wherein it utilizes a Studio approach (Studios are deep pockets of expertise on the latest technologies and trends), an agile podular team Source: 4Q20 Investor Presentation structure (Agile Pods), and artificial intelligence Artificial intelligence augments Globant’s (via its “Augmented Globant” initiative) to technological capabilities and helps it to speedily provide a superior value proposition of its digital deliver digital and cognitive transformations for transformation services to its customers. businesses in the fast-changing technology The company’s 27 Studios enable it to build, industry landscape. enhance and consolidate expertise around a RECENT DEVELOPMENTS variety of emerging technologies and deliver insights from different industries to create Strong 4Q20 Top-line Growth with Improved disruptive software solutions, which can also be Revenue Concentration and Geographic Mix: leveraged to create cross-selling opportunities Globant delivered solid top-line growth in 4Q20 across customers in different industries. as its revenues grew by 26.2% y/y and 12.3% q/q SEEKING STOCKS THAT CAN DOUBLE IN 2-3 YEARS 4 LEFTBRAINIR.COM . 630-517-9300 0.94 STOCK: GLOB | 2/25/21 FIRST FOCUS to $232.6 million, and beat its own estimate of industrywide average attrition rates of 15% to $220 million provided during 3Q20. The growth 25%. Going forward, the company views 14% to was driven by a 14.8% y/y and 10.4% q/q 16% attrition rates as normal. expansion within its largest customer Disney, as well as a solid 27.7% y/y and 12.5% q/q growth in the rest of the accounts. The company also LB•LOGIC The ability of IT continued to increase the share of wallet from the professional services companies to meet demand from their customers is top five and top ten accounts, which grew at highly dependent on their ability to robust rate of 40.2% y/y and 40.8% y/y, keep their headcount at an optimum respectively. Importantly, revenue concentration level. Higher level of attrition offsets improved during the quarter, as the top one, top new employee additions and adds to 5 and top 10 customers represented 10.7%, 30.0% unwanted costs, while lower level of and 42.9% of the revenues, respectively, their utilization also tends to compared to 10.8%, 32.2% and 45% in 3Q20.