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EPAM Systems' High Multiples Shouldn't Bother You

Jan. 13, 2021 1:49 PM ETEPAM Systems, Inc. (EPAM) Stock8 Comments


  • EPAM Systems, Inc. is a U.S. IT-engineering company that operates in 30 countries providing IT product development, digital platform engineering, and product design services.
  • The Total Addressable Market (TAM) of the company is estimated to be $1 trillion, while its market capitalization is around $19.2 billion.
  • The cheapness of human capital is the key competitive advantage of EPAM.
  • The company has high market multiples, which are justified by the rapid growth in revenue, EBITDA, and other key indicators. From this point of view, EPAM is more undervalued than overvalued.
  • Based on carried out technical analysis, I would recommend buying EPAM at its current levels, or waiting for the price to approach its support level of $320.

Summary Investment Thesis

EPAM Systems, Inc. (NYSE:EPAM) is a global leader in the provision of IT engineering and consulting services for the development of software and other IT products.

The company does not have sharp jumps in its business shares, but in recent quarters it has been dominated by customers from the Business Information & Media sector.

The company estimates its total addressable market (TAM) to be $1 trillion (as of November 5, 2020), while the market capitalization of EPAM at the time of writing this article is only $19.2 billion. That is, the company has room to grow, and this growth is inevitable for some reasons.

Firstly, the company has a huge advantage over its competitors: the cheapness of human capital. Most of the employees work from Belarus, Ukraine, and Russia. The comparison of the average IT-salaries of those regions with the average IT-salaries in the United States made it possible to determine that EPAM can save tens of millions of dollars on this cost item.

Secondly, financial performance. All analyzed financial ratios speak of the sustainability of EPAM's business: small debt that can be paid off from the company's operating profit >10 times in a row; double-digit revenue growth amid rising working capital. Free cash flow for 9 months of the fiscal year 2020 grew by almost 20 times, YoY.

The market valuation ratios are quite high when simply compared with the industry average. However, if we match them with the real values ​​of the company's growth (revenue growth, EBITDA growth, etc.), it turns out that these ratios are justified. Moreover, the company remains undervalued compared to its peers.

Concerning the technical analysis carried out, it can be argued that shortly the stock may get to the support level in its price channel. But if the price holds, then amid the

This article was written by

Danil Sereda profile picture
Daniel Sereda is chief investment analyst at a family office whose investments span continents and diverse asset classes. This requires him to navigate through a plethora of information on a daily basis. His expertise is in filtering this wealth of data to extract the most critical ideas. He runs the investing group Beyond the Wall Investing in which he provides access to the same information that institutional market participants prioritize in their analysis. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

From 2012 till 2020 EPS CAGR was about 20%, while stock price CAGR was about 40%.
If that is not a sign of overvaluation, I do not know what is...
P/E 85? C'mon...
Compare with Apple, Google, FB and the likes...

BTW, I contract for the company at the moment and it is a great one, but stock price seems a bit nonsensical to me personally...
jillydavid profile picture
Nice article. Calculating the PEG ratio should solve the problem of combining current valuation with growth. The charts were also a nice representation. Why are you not long EPAM?
Danil Sereda profile picture
@jillydavid Thanks! I'm personally LONG
Millennial_Tyler profile picture
Huge shortage of IT professionals in United States and the west in general. This wont always be the case but for now it very much is. Cant see how EPAM doesnt keep killing it for the next few years with the cheaper labor. The work from home switch will only encourage US companies to use them more since onprem consulting/contracting is no longer necessary. One of the big roadblocks for more use has always been the limited amount of Visas. Obviously with WFH a Visa isn't required.
mtaar profile picture

in Ukraine the EPAM's competitor is LUXOFT

James Melvin profile picture
Thanks for the article. I would say that closer competitors would be Globant (GLOB), Accenture (ACN), Cognizant (CTSH), and Infosys (INFY)/ Wipro (WIT) on the lower end of consulting IT companies.
Danil Sereda profile picture
Thank you! Nice point. I believe EPAM will have the same position if we change the peers for comparison.
James Melvin profile picture
@Danil Sereda Certainly agree there. Only own EPAM of the bunch. GLOB is a similar model using primarily South American employees for a low cost model to IT consulting/ digital transformations. I would check it out if you like the EPAM model.
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