This Consulting Stock Could Be a Massive Winner, Despite Scalability Concerns

In this clip from "The Rank" on Motley Fool Live, recorded on Feb. 7, Motley Fool contributors Jason Hall, Taylor Carmichael, and Matt Frankel discuss their thoughts on investing in a consulting business, which company they think is an impressive leader in the industry, and why digital transformation is driving the need for such consultancies.

Jason Hall: EPAM Systems (EPAM -0.61%) is a really interesting business. This is a consultancy that's large and growing and I guess the best way to describe this company is digital transformation. Enterprises that are looking to go through digital transformation in some way, bringing in systems that help them be more efficient and effective, EPAM Systems is a growing leader in this space. I'm going to give a little premium something away here. I think it's really interesting. For those of you who are tuning in to watch us, congratulations, you're going to get a little bit of a nice thing. A few months ago, EPAM Systems was added to the Backstage portfolio. For those of you who don't have access to Backstage pass, there's a little free stock pick for you. It was part of a basket of companies that are in this consulting space that have an enormous amount of potential. EPAM Systems has almost 53,000 employees, a lot of which are consultants working in 40 countries. It is not a small business, 90% of those employees are either consultants, engineers, or designers. Here's the verticals that it targets the most, business information and media, emerging verticals like automotive and manufacturing, energy, government, telecommunications, and then it works in financial services, life sciences, healthcare, software tech. Again, a lot of that focus is on digital transformation. It's growing on a global basis. About 60% of its revenues are from North America, but about a third of it comes from Europe and it's expanding pretty quickly into Asia-Pacific in that area. It's a really interesting business. One of the founders, I believe, is still running the business, so that's something that's always pretty impressive. Let's see. Where did I rank EPAM Systems? I believe this was my second. I ranked this one second. I ranked this substantially higher than either of you guys did. Taylor, I'm curious as to where you ranked it.

Taylor Carmichael: I don't remember off-hand, Jason. I think I ranked it in the middle there. It's six or seven, I think. My take on it, I guess I worry about a consulting business. Their inability to scale like a tech business can because technology, you write one piece of wonderful software and you can make so much money off of that one piece of software. Whereas consulting, you got to do it over and over. If you want to grow, you've got to add more employees, you got to add more people, and so it's more labor-intensive. I don't think I've ever invested in a consulting business. In comparison to a typical tech company where they write software, create hardware, this would seem to be very human-intensive and so it won't have that parabolic growth that some other tech companies would have. That would be not a red flag, but a warning, I guess.

Hall: Matt?

Matt Frankel: I can say that everyone who tells me that they're a consultant, it's code for they make a lot of money. [laughs] That's what I think of here. It could be a great business. It's great margins, especially what they're doing. I agree with Taylor. How scalable is it? It seems like a great business. I just think there are a lot of other ways to play the digital transformation like a few of the ones we're going to mention a little bit later on the show. I completely see why you ranked it No. 2. Do you own the stock by the way, Jason?

Hall: I don't. I've been following it pretty closely and it's one that I'm actually thinking about doing a basket approach with four or five different consulting companies and also looking at some asset management as part of that same basket. I think there's a lot of trends that support people looking for experts in these areas. Even though you don't necessarily see those same incremental margins, what happens is your customers, you keep them. They're very profitable once you keep and you do more business with them.