Shares of technology consulting company Globant (GLOB -0.13%) have been on an absolute tear since it went public back in July 2014. Globant priced its IPO at $10 per share and is currently trading at $103.02, at the time of writing. So an investment of $1,000 in this stock during its IPO would have returned $10,300 in less than six years, easily outperforming the S&P 500 as seen in the below chart.
The stock touched an all-time high of $141.67 earlier this year before the COVID-19 pandemic-led sell-off drove it lower. However, past returns matter little to prospective investors. What they want to know is if the stock is an attractive buy at the current price.
What does Globant do?
Globant is an Argentina-based company and was, in fact, the first Latin American software company to list on the NYSE. Globant leverages its technological expertise in the digital-cognitive space to transform organizations. This transformation affects the way companies connects with their employee and customer base. It assesses the internal processes of an organization and prepares a road map to help them succeed in a digital environment.
Like a typical consulting company, it also helps shape the client's business strategy to ensure long-term growth and sustainability. Globant aims to power the potential of AI (artificial intelligence) and automation to create an effective operational environment that accelerates the digital transformation process for its clients.
Globant services clients across industries. In 2019, the media and entertainment vertical accounted for the majority of revenue at 23.7%, followed by 21.8% in banking and financial services, 14.1% in travel and hospitality, and 13.4% in tech and telecom.
Globant has been able to increase its customer base and drive top-line growth at a robust pace over the years. It ended 2019 with a customer base of 822, more than doubling it from 373 in 2018. Its sales have risen from $254 million in 2015 to $659 million in 2019. This growth has also helped the tech firm to increase adjusted earnings from $0.93 to $2.29 in this period.
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Its top client -- Disney (DIS 0.16%) -- generated 11.2% of sales in 2019, while the top 10 largest clients raked in close to 40% of revenue. Revenue from Disney rose 25.5% last year, while the growth figure for the rest of its clients stood marginally higher at 26.3%.
Large addressable market
In 2019, Globant had 14 accounts generating over $10 million in annual sales, up from nine in 2018. Its diversified industry base indicates there is an opportunity to attract clients across verticals. Every industry has invested heavily in digital transformation projects in the last few years and is expected to do so in the upcoming decade as well.
Gartner, the global research company, expected the total IT spending to reach $3.9 trillion in 2020 , while the digital services market is estimated to touch $154.5 billion by 2022, a growth of 19.2% per year. While the COVID-19 pandemic will lower enterprise spending this year, investors can expect this metric to rise consistently in the near future.
Near-term headwinds and high valuation will make Globant stock volatile
As stated above, the COVID-19 will weigh heavily on enterprise IT spending this year. Though Disney has extended its contract with Globant for five years, the entertainment giant has had to shut down its parks, movie theaters, and cruise ships, which will mean a daily revenue loss of $30 million.
Globant also has high exposure to the travel and tourism vertical, another sector that has been decimated in recent times. Several businesses are expected to remain shut, and economists predict a recession far worse than the one experienced back in 2008-09, which means equity markets will be volatile in 2020.
While Globant raised its outlook for the March quarter, it withdrew guidance for the rest of 2020. In the first quarter of 2020, the company forecast sales of $190 million with earnings of $0.62. This indicates a revenue growth of 30% and is marginally higher than its prior revenue outlook of $188 million , provided during the last earnings call.
In a market sell-off, stocks trading at high valuations are hit hard. Globant has a market cap-to-forward sales ratio of 4.8 and is trading at a forward price-to-earnings multiple of 39.2, which is almost twice as high as the forward P/E multiple of 19.9 for the IT sector. We can see why the stock lost over 50% in market value between February 21 and April 3 this year.
The verdict
Globant increased its workforce by a stellar 41% in 2019 indicating growing demand for its services. The steady accretion among high-value clients shows Globant can increase the net retention rate among these customers, which will contribute to revenue growth.
Several companies across industries are prioritizing transformation projects in this digital age, which will keep the cash flows going for technology consulting companies such as Globant. The company's expanding addressable market, stellar client base, and improving profit margins make it a solid long-term bet for investors.
