What happened?
EPAM Systems (EPAM -1.13%) stock rose 13% in August, with a notable gain after the company reported better-than-expected earnings results and raised its guidance for the rest of the year. Revenue and profits both exceeded the top end of its second-quarter forecast ranges. The stock continued to rise later in the month as investors moved back into growth stocks after well-received statements from the Federal Reserve.
So what?
EPAM is an IT services company that's successfully taken advantage of economic trends that are boosting demand for its variety of tech expertise. The company provides consulting, design, analytics, and engineering services to customers across numerous industries, supporting such areas as product development and platform creation, which are prominent needs for businesses in the midst of digital transformations. EPAM's collective experience makes it a valuable outsourcing partner for customers that would otherwise lack the scale to hire the tech experts necessary to make those changes in-house.
Its revenues have grown at a compound annual rate of 22% in recent years, and it still managed to exceed analysts' expectations and reach all-time highs in its most recent quarter.
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Second-quarter revenue grew almost 40% over the prior year to $881.4 million, surpassing estimates by $19 million. Its adjusted EPS of $2.05 also beat the consensus forecast of $1.93. EPAM increased its full-year revenue growth guidance to 47% from 35%, and maintained its operating margin forecast. It also revised its adjusted earnings per share guidance upward to $8.35 from $7.65.
The company reported strong results across all geographies and business segments, indicating a broad-based set of catalysts. EPAM is delivering in the new global economy. For shareholders, the news couldn't have been much better.
Now what?
It's hard to poke any holes in EPAM's execution and financial performance. The only downside for new investors now might be the stock's aggressive valuation. Its forward price-to-earnings ratio of 46.7, price-to-sales ratio of 12.5, and price-to-book ratio of 16.5 are all substantially higher than the company's historical averages. Such statistics aren't abnormal for high-growth stocks in today's stock market -- some of EPAM's industry peers sport even loftier valuations. Still, risk-averse investors should consider the potential for downward price movements in the event of stock market volatility.
We've seen what strong results and a risk-tolerant investment environment can do for EPAM, and that momentum could keep the stock moving along for a few months. Just don't be shocked if it sinks sharply in the event of a broader market correction. Great financial results might not be enough to keep this stock moving upward in a bearish environment.
