Globant: Fast Growing Digital Transformation Player Enabling Global Innovation (GLOB)

Investment thesis

I think Globant (NYSE:GLOB) still looks interesting as an investment and the investment thesis is as follows:

Firstly, from the recent quarterly update, I like that Globant is still growing above 30% at the top-line while generating profits and cash flow for investors. Furthermore, in the current uncertain macroeconomic environment, it continues to invest and innovate and continues to expand geographical locations to extend its reach.

Secondly, as a technology service provider based in Latin America, Globant is able to ride the digital transformation tailwind with increasing spend on artificial intelligence, virtual reality, block chain and other emerging technologies. More importantly, Globant has been able to demonstrate its strong value proposition by helping its customers reinvent themselves and adapt their business models as the world changes.

Thirdly, Globant has a clear expansion strategy, with a focus on expanding their current business with current clients, as well as landing new customers and lastly to focus on innovation to bring new products and services to their customers.

Last but not least, I think that Globant’s client base is rather attractive given that there is a large customer base and the relationships with these clients continue to grow and this is evident from the increasing spend by its top clients.

I have written an earlier article on a deep dive into Globant, its market opportunity, and strategy, which can be found here.

Globant’s customers continue to see strong growth

As the largest customer of Globant, Walt Disney (DIS) continues to be the largest contributor to the Globant business as the Disney account grew 43% year on year. The other accounts also showed strong growth as they grew 40% year on year. More importantly, the number of clients with more than $1 million of annual revenue increased from 154 one year ago, to 233 today. In terms of geographical distribution, 65% of revenues are from North America, while 24% of revenue was from Latin America, 10% from EMEA, and 2% from Asia and Oceania.

In the last 12 months, Globant increased accounts that brought in more than $20 million in revenues from nine one year ago to 13 accounts today, as the company builds on existing relationships and monetizes these relationships.

Globant is also focused on its Net Promoter Score to measure how satisfied its customers are. The company continues to grow the score in 2Q22 to 75, up 7 points from the last quarter, well over the industry average of 41. In addition, in the past 12 months, Globant achieved a Net Promoter Score of 70, up 4 points from its score in the first quarter last year. This highlights a strong indication that Globant is doing well in managing its customer relationships, with key customers continuing to see the value add and quality that Globant brings, and these very customers are willing to promote Globant’s offerings to their own networks.

In terms of the business visibility that management has eyes on at the current moment, Globant continues to see that its customers are in a strong condition and still relatively healthy in an uncertain macroeconomic environment. While I think that it is undeniably difficult for management to be forecasting how their customers could be doing in a recession scenario, there are some signs that the high-tech space is suffering somewhat in the current business environment we are in today.

That said, the main and largest customer of Globant, Disney, is seeing good growth momentum as the company has actually surpassed Netflix in terms of monthly subscribers across their platforms and the company’s parks are also doing well. Management has visibility on Disney’s growth likely to increase in the third quarter which is likely a good leading indicator for the business in the near-term. In the longer-term, if a recession were to occur, Globant is in a good place as they are not very highly exposed to the companies that are facing problems at the moment.

Attractive profitability and cash flow position

In 2Q22, adjusted gross margins were flat at around 39%. While there were increases in revenues in key markets, gross margins were largely flat as a result of positive pricing dynamics and the company’s focus on profitable growth.

The gross margin levels of Globant continue to be within that of leaders in the industry, further demonstrating the value that Globant brings to its customers.

Adjusted operating margins were also flat at around 16% as Globant continues to see resilient demand and a favorable pricing environment, along with efficiency improvements in SG&A as a result of increasing scale.

The company remains committed to investing for the opportunity ahead of it. Adjusted net income margin was 12%, up 10 basis points compared to the prior year. Adjusted EPS for 2Q22 was up 39% year on year.

All these highlight the ability of Globant to grow at a consistent strong revenue growth rate while prioritizing profitability and improving efficiencies while doing so.

Attrition rate at the lowest for the year

The Globant team continues to grow, with the IT headcount increasing 33% year on year. The encouraging data point is that the company saw attrition rate remained flat in the quarter as it currently stands at around 20%. In fact, the company had the lowest level of headcount attribution year-to-date in June. The company remains committed to retaining talent and being an employer of choice for its key talent.

Geographical expansion

Globant continues to execute on its strategic growth pillars. The first being geographical expansion. The company expanded to Canada with its new office in Toronto, expanding business opportunities in the region and potentially serving more Canadian customers.

Globant is also expanding its presence in Europe by announcing its operations in Poland, with a new talent hub in Warsaw.

Valuation

I continue to like Globant as a company as it delivers solid results while the market has been rather volatile and uncertain. Globant’s management has more visibility over its business today than it did in the pandemic and this bodes well, in my view, for guidance as management is likely to guide more accurately, reducing the likelihood of an earnings miss. I also think that Globant has had a strong track record in the past few years. Given these reasons, I think that Globant should be trading at a premium multiple than its other pure play digital services peers.

Also, I think that Globant will continue to grow faster than the industry average for digital services companies, which further warrants a premium multiple to be applied to the company.

With that, I assume a 2024F P/E of 40x, while other comparable competitor companies trade in the range of forward 30x to 45x P/E.

Using my forecast for 2024 EPS of $8.10 and assuming a discount rate of 13%, my target price for Globant is $287, implying a 76% upside from current levels.

Risks

Geopolitical risks

Since a large part of Globant’s operations are in the Latin America region, the company is subject to greater political, tax and economic risks than developed markets. Any heightened risks could adversely affect Globant and cause downside revisions.

Talent risks

While attrition seems to have stabilized in the quarter, there is the risk that Globant is unable to hire and retain the key talent it requires to provide its suite of solutions. They key concern is the talent requirement that includes professionals with strong technological expertise in AI and ML.

Concentration risk

The largest client makes up 11% of revenues and thus has a disproportionate impact on the business. If there were to be a slowdown in this client’s business, it will certainly affect Globant as well.

Competition

Competition remains fierce in the IT services industry and the industry remains fragmented. Globant’s competitors come from large global consulting firms, digital agencies and technology outsourcing providers. These competitors may increase pressure on Globant and cause the industry dynamics to turn unfavorable for Globant as this is likely to affect growth and margin profile.

M&A integration risk

Since strategic acquisitions are one strategy Globant takes to grow, there is the risk that the newly acquired company is not integrated well into the group. This might lead to lower-than-expected synergies or efficiencies to be reaped.

Conclusion

I continue to like Globant as a company deeply embedded in the digital transformation wave as it helps customers reinvent and transform their business models to the new world. The recent quarter showed that Globant continues to remain resilient even in uncertain times as its customers continue to spend on the Globant platform and remains resilient. The company didn’t just generate robust revenue growth in the quarter, but it also saw attractive profitability and cash flows in a time when these are highly valued by the market. Lastly, the company remains focused on expansion and growth and continues to attract and retain the talent necessary for this. My target price for Globant is $287, implying a 76% upside from current levels.