Globant: Approaching A Defensible Valuation, Upgrading To Hold

Jun. 29, 2022 12:14 AM ETGlobant S.A. (GLOB)1 Like
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Summary

  • After a significant share price decline, and continued improvement in fundamentals for Globant, we no longer believe shares to be extremely overvalued.
  • We think the current share price can be more easily justified, but there is still a high level of uncertainty as to what the average growth rate will be.
  • We believe that at least going forward investors should see returns more in line with business fundamentals, now that shares are trading at a more reasonable valuation.

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We covered Globant (NYSE:GLOB) at the end of last year, and in that article we introduced the company and shared why we believed it was extremely overvalued despite there being much we liked about it. Since then shares have significantly under-performed the market by a factor of more than 2x. In fact shares have been nearly cut in half, so we thought it might be a good time to revisit the company and see if the overvaluation has been corrected.

Globant Rating by WideAlpha

Seeking Alpha

Addressable Market

One of the reasons shares got so expensive is because investors are excited by the massive addressable market the company is targeting. While we agree that this TAM is enormous, there are a lot of companies competing for it, and we do not see the company having a particularly strong competitive moat that would allow it to capture the majority of these markets.

Globant TAM

Globant Investor Presentation

Financials

We have to give credit to the company, its revenue growth has been nothing short of impressive, and it has even accelerated in recent years.

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Data by YCharts

Also impressive, this has been profitable growth, with the company posting very decent and stable profit margins.

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Data by YCharts

That said, these are the profit margins and returns on invested capital of a relatively normal company. If Globant had a strong competitive moat, we would expect much higher gross profit margins, and much higher returns on invested capital.

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Data by YCharts

Growth

Since its IPO Globant has delivered average growth of ~31%, and it has accelerated recently, as can be seen in the graph below. The big question for us is how much longer Globant can sustain this level of growth, as competition is likely to intensify and we do not see any particular competitive advantage that would favor the company over the competition. Globant appears to be a very efficient operator, but that is not enough for the company to capture the majority of the growth in its markets.

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Data by YCharts

Balance Sheet

Globant has a very solid balance sheet, with about $373 million in cash and short-term investments, and very little in long term debt.

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Data by YCharts

ESG

We like that Globant has a strong ESG approach, and that it appears to treat its employees well, judging by the very high Glassdoor rating the company has, and the high percentage of employees willing to recommend the company to a friend and approve of the CEO.

Globant ESG

Globant Investor Presentation

Globant Glassdoor Rating

Glassdoor.com

Valuation

Another reason we worry that growth rates might start coming down is that Globant is no longer a startup, but a company with an $8 billion market cap with almost $1.5 billion in revenue. There is no rule that says that a bigger company has to grow at a slower pace, but it does mean that it has to win so many more contracts or much bigger contracts to maintain the same level of growth.

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Data by YCharts

In any case it is good to see that the valuation has become more reasonable, with EV/Revenues at ~5.4x, after having reached an extremely expensive 13x multiple.

Chart
Data by YCharts

EV/EBITDA has also come down, and is now at ~42x for the trailing twelve months, and ~21x for the forward multiple. A 21x multiple certainly starts sounding a lot more reasonable, especially compared to the triple digits it previously reached. This is thanks to a combination of improving fundamentals, and a declining share price, that the valuation has readjusted so quickly.

Chart
Data by YCharts

The forward price/earnings ratio stands at ~38x, which does not sound like a bargain, but can be justified by the growth of the company.

Chart
Data by YCharts

To get a better sense on whether shares are still over valued we did an estimation of the net present value of the shares, which resulted in $193, which is very close to where shares are currently trading. The assumptions we used were the average earnings estimates for the next three years, as compiled by Seeking Alpha, and 15% growth thereafter until 2032. We then used a GDP-like 3% terminal growth rate, and discounted everything by 10%. The most controversial number is likely to be the 15% growth rate after 2024, with some investors likely thinking it is too conservative, and others believing we shouldn't project such a high growth rate for so many years. We decided to use 15% because it is half of the average revenue growth for the company over the last ten years, so we wanted to see what a reasonable valuation would be if the company grows at half the speed compared to the previous decade.

EPS Discounted @ 10%
FY 22E 4.98 4.53
FY 23E 6.38 5.27
FY 24E 8.34 6.27
FY 25E 9.59 6.55
FY 26E 11.03 6.85
FY 27E 12.68 7.16
FY 28E 14.59 7.49
FY 29E 16.77 7.83
FY 30E 19.29 8.18
FY 31E 22.18 8.55
FY 32 E 25.51 8.94
Terminal Value @ 3% terminal growth 364.46 116.13
NPV $193.74

Risks

We believe the company has had a tremendous tailwind from the weakness in the currencies of emerging market economies, such as Latin American countries, where most of the company's costs and headcount is located, and from the strength in the currency in which it receives most of its revenues, mostly US dollars. Should this trend reverse it could become a headwind instead, and make the company less competitive.

Another risk we see for the company is that of intensifying competition, as it operates in large markets which are likely to attract more and more competition, especially as the size of the market grows.

Globant Currency & Headcount

Globant Investor Presentation

Conclusion

After a significant share price decline, and continued improving fundamentals for Globant, we no longer believe shares to be absurdly overvalued as we believe they were. We think the current share price can be justified, but there is still a high level of uncertainty, since it is difficult to estimate the growth rate for the company for the next few years. We believe that at least going forward investors should see returns more in line with business fundamentals, now that shares are trading at a more reasonable valuation.

This article was written by

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares, you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.

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