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A Forensic Review Of Globant SA (NYSE: GLOB) Suggests 40% To 50% Downside Risk

|Includes: Globant (GLOB), LXFT

Summary

Globant is an ineffective roll-up of digital IT outsourcing companies that has not generated cumulative free cash flow.

Management has lead investors to believe it's capable of delivering consistent organic revenue growth of 20% p.a. but does not provide adequate disclosure of deal contributions.

Spruce Point estimates that Globant's actual organic revenue growth has been decelerating for three years, and was ~15% in 2017, a result that fell below management's target.

WPP is Globant's largest shareholder, and Sir Martin Sorrell is on its Board of Advisors. Yesterday's news that Sir Martin is under investigation by WPP's Board could be a major overhang to Globant.

Globant's shares trade at a significant premium to peers, despuite difficulties generating cash, slowing growth, higher employee turnover, and aggressive presentation of "adjusted" results. Our normalized valuation suggests 40-50% downside risk to $24.50 to $29.50 per share.

Report Entitled "Global Crisis of Management Confidence"

Executive Summary

Spruce Point Capital Management is pleased to announce it has released the contents of a unique research report on Globant SA (NYSE: GLOB) ("Globant" or "the Company").

Spruce Point has conducted a critical forensic and fundamental analysis of the Company. In our opinion, the current management is misportraying the organic revenue growth inherent in its technology outsourcing business. By leading investors to believe that it is achieving consistent 20% p.a. organic revenue growth, GLOB’s shares command an industry leading valuation. We estimate this has allowed insiders to quietly dispose or transfer of $80m in shares via an unusual dual-listing share structure in the US and Luxembourg. Spruce Point believes that GLOB’s organic growth rate has in fact been decelerating, and is now below target. We find evidence to suggest that management is growing dependent on accounting and financial presentation gimmicks to embellish a business that has generated negative cumulative free cash flow since coming public.

Spruce Point also believes the recent news that WPP’s CEO Martin Sorrell is under investigation for possible misuse of assets and allegations of improper behavior are a potential overhang for GLOB’s share price. WPP is GLOB’s largest shareholder (~20%), Mr Sorrell is a member of Globant’s Board of Advisors, and WPP represents $6m+ of related-party revenue for Globant.

As a result of our investigative analysis, we have issued a "Strong Sell" opinion, and a long-term price target of approximately $24.50 to $29.50 per share, or approximately 40% - 50% downside risk.

Our detailed research report is available on our website. We also encourage all of our readers to follow us on Twitter @sprucepointcap for regular updates. Please review our disclaimer at the bottom of this email.

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Disclaimer

This research presentation expresses our research opinions. You should assume that as of the publication date of any presentation, report or letter, Spruce Point Capital Management LLC (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our subscribers and clients has a short position in all stocks (and are long/short combinations of puts and calls on the stock) covered herein, including without limitation Globant SA (“GLOB”), and therefore stand to realize significant gains in the event that the price of its stock declines. Following publication of any presentation, report or letter, we intend to continue transacting in the securities covered therein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. All expressions of opinion are subject to change without notice, and Spruce Point Capital Management does not undertake to update this report or any information contained herein. Spruce Point Capital Management, subscribers and/or consultants shall have no obligation to inform any investor or viewer of this report about their historical, current, and future trading activities.

This research presentation expresses our research opinions, which we have based upon interpretation of certain facts and observations, all of which are based upon publicly available information, and all of which are set out in this research presentation. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward looking statements, expectations, pro forma analyses, estimates, and projections. You should assume these types of statements, expectations, pro forma analyses, estimates, and projections may turn out to be incorrect for reasons beyond Spruce Point Capital Management LLC’s control. This is not investment or accounting advice nor should it be construed as such. Use of Spruce Point Capital Management LLC’s research is at your own risk. You should do your own research and due diligence, with assistance from professional financial, legal and tax experts, before making any investment decision with respect to securities covered herein. All figures assumed to be in US Dollars, unless specified otherwise.

To the best of our ability and belief, as of the date hereof, all information contained herein is accurate and reliable and does not omit to state material facts necessary to make the statements herein not misleading, and all information has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer, or to any other person or entity that was breached by the transmission of information to Spruce Point Capital Management LLC. However, Spruce Point Capital Management LLC recognizes that there may be non-public information in the possession of GLOB or other insiders of GLOB that has not been publicly disclosed by GLOB. Therefore, such information contained herein is presented “as is,” without warranty of any kind – whether express or implied. Spruce Point Capital Management LLC makes no other representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.

This report’s estimated fundamental value only represents a best efforts estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as, assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an investor. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Spruce Point Capital Management LLC is not registered as an investment advisor, broker/dealer, or accounting firm.

Disclosure: I am/we are short GLOB.