What happened
Shares of technology consulting firm EPAM Systems (EPAM 0.65%) plunged on Monday, down 21.7% as of 3:51 p.m. ET.
The IT consulting firm has had a rough go of it over the past 18 months or so, as the broader tech slowdown hurt its growth. In addition, EPAM also had significant business in Russia, which it exited last year, with many employees in Ukraine and Belarus. Even today, Ukraine is still the country with the most delivery professionals for EPAM, with about 10,500 IT consultants there, or roughly 20% of its workforce.
While some may have thought the tech world had hit bottom last quarter, it appears demand for EPAM's services is still stagnant, and could remain so for the rest of the year, as today's preannouncement showed.
NYSE: EPAM
Key Data Points
So what
EPAM filed a press release and held a conference call today, recalibrating expectations for the current quarter and full year. This is somewhat surprising, as the company just made its prior guidance on its Q1 earnings call one month ago on May 5.
In the release, management explained:
In the weeks since our Q1 earnings call, we have seen our clients become even more cautious with spending, specifically in the 'build' segment of the global IT services market. After careful assessment of changes in our May and June forecast data, we have come to understand that pipeline conversions are occurring at slower rates than previously assumed, and we are also seeing some reduction in the total pipeline.
Management now expects $1.160 billion to $1.170 billion in revenue in the second quarter, down 2.5% in constant currency and excluding the impact of the Russia exit. That's below initial guidance of $1.195 billion to $1.205 billion given on the last conference call.
For the full year, EPAM now sees $4.65 billion to $4.80 billion in revenue, below the $4.95 billion to $5.00 billion range given a month ago. Management now expects generally accepted accounting principles (GAAP) earnings per share in the range of $7.28 to $7.68, down from its prior $10.60 to $10.80 guidance.
EPAM Revenue (Quarterly YoY Growth) data by YCharts
Now what
The news is certainly not great for EPAM, which is now trading back down to levels seen in the immediate aftermath of Russia's invasion of Ukraine back in February 2022. However, this high-priced stock is now trading at a more palatable 27.5 times this year's revised-down earnings expectations. Management also noted on the call that the new guidance assumes continued weakness in the IT market through the rest of the year.
So, could the sell-off be an opportunity? Prior to the pandemic, EPAM was typically growing 20% to 30% per year, before revenue growth skyrocketed into the 50% range in the 2020-2021 pandemic period as customers scrambled to invest in digital transformation. Now, like many technology companies, EPAM is experiencing a hangover from that burst of growth amid higher inflation and interest rates, with revenue growth now going slightly negative.
With the business in Ukraine continuing at preinvasion levels and earnings expectations now revised downward, EPAM may be an interesting target for growth stock investors. If the Ukraine war eventually comes to a conclusion and IT spending eventually recovers, EPAM could very well return to the 20%-plus growth it was seeing pre-pandemic.
If that happens, there could be solid upside for EPAM over the long term. But today, EPAM is an unloved stock, and it appears a recovery is now further off than management and investors had expected.
