shulz
Overview
I believe Thoughtworks (NASDAQ:TWKS) is worth investing in. TWKS is an international technology consulting firm that helps businesses adopt modern technology. The company helps to overcome the challenges of digital transformation by providing expertise in organizational alignment and end-to-end capabilities.
Business description
TWKS is an international technology consulting firm that uses a multidisciplinary approach to help enterprises adopt modern technology.
Adopting modern technology is a must
The advent of these cutting-edge technologies has sparked a digital revolution, ushering in the digital age for economies around the world by means of ubiquitous connectivity, highly effective cloud computing, and cutting-edge data analytics. Business models, the competitive landscape, and consumer expectations have all changed as a result of technological progress, in my opinion. Because of the constant evolution of technology, businesses of all sizes and in all parts of the world need to undergo full and continuous digital transformations to survive. (I highly recommend “Software is Eating the World,” by Andreessen, to anyone interested in this topic.)
Some of the key trends I observed are:
First, the proliferation of AI and ML, which improves efficiency and propels digital transformation by providing forecasts to help humans make decisions and, in some cases, fully automating those decisions and tasks by themselves. The benefits of AI and ML-based tools are transferable across the board, from production and upkeep to sales and support. As a more modern illustration, we can look at the meteoric rise in popularity of ChatGPT.
Second, customers want a more immersive experience, which is made possible by the convergence of the digital and physical worlds in the form of AR and VR. Customer service that delivers on the promise of personalization and seamless, rich interactions is now the norm. Businesses are working harder than ever to give customers a seamless omni-channel experience across all channels and interfaces, including ones that appeal to all five senses.
Lastly, privacy and security. Cyberattacks, data breaches, and other security issues are becoming more likely as technology evolves. It is becoming an increasing source of anxiety for a growing number of companies. As consumers become more aware of the effects of artificial intelligence and algorithmic bias, protecting their personal information becomes increasingly important.
Although digital transformation is widely recognized as essential, businesses still face a number of significant obstacles along their paths. Most corporations understand this shift to be significant. Unfortunately, as innovation speeds up, many businesses still struggle to identify the technologies that will most effectively generate value and maintain their competitive edge.
At a high level, digital transformation requires management to adopt a new way of thinking and buy-in from many different parties. Oftentimes, businesses struggle to synchronize their priorities due to tensions over competing uses of technology. And while businesses are aware of the value of digital transformation, it can be difficult to find and train the talent necessary to make it happen, especially among those with little to no experience with computer technology. Due to the intense competition for tech talent, I believe that most businesses are short on technically proficient workers.
Furthermore, businesses have been forced to reevaluate their operations, utilize digital products of the future, and innovate continuously due to the ferocity of the competitive innovation landscape. This leaves them unprepared to meet the shorter product cycles and increased expectations of today’s consumers.
TWKS has the necessary expertise to bridge the gap between businesses and modern digital tools
Organizational alignment is fundamental to digital transformation. Simple departmental changes, like those made to human resources, will not produce desirable outcomes. TWKS excels at this. The ability to quickly respond and realize value is made possible by their distinct and consistent global approach and their end-to-end capabilities (from planning to execution) in organizational transformation. In my opinion, this is a key reason why clients choose Thoughtworks to address their most challenging issues. Through early involvement, co-creation of strategic frameworks, development of digital platforms, and introduction to cutting-edge tech, TWKS helps its clients prepare for and succeed in the digital world of the future.
Also, it made me feel better to know that TWKS has a lot of experience and expertise in their field. The many books and other writings on software engineering and technology show that Thoughtworks was a forerunner in the development of some of today’s most important technologies. In addition to their many contributions to open source, TWKS is also widely recognized as a technological pioneer, particularly in the area of distributed agile software development. And if we look back over the past 20 years, they were delivering software in an agile fashion, and later, digital transformation, well before either was commonplace.
To me, TWKS has already proven itself to be a major player in the market, and I expect them to maintain that status going forward.
Global scale to meet the needs of businesses anywhere
As a result of increased communication and transportation options, more businesses now have the opportunity to expand internationally. Thus, a global scale is essential.
One of the main reasons TWKS can give their clients access to the diverse talent they need across all five continents is because they use skilled and distributed teams to deliver software projects. At its core, TWKS’s culture of collaboration allows them to draw on the knowledge and experience of Thoughtworkers all over the world. I believe that TWKS’s global reach guarantees its ability to meet international clients’ needs, and that its local presence enables it to work with international clients across time zones and languages to develop creative, efficient solutions.
Competition
TWKS competes with a wide variety of companies and service providers from all over the world because it operates in a dynamic, international market. The market is highly competitive, with notable rivals including Globant S.A., EPAM Systems, Accenture, McKinsey, Cognizant Technology Solutions, and even in-house development teams. The ability to make strategic acquisitions and greater financial stability mean that some of these businesses can rapidly expand their offerings and geographic reach.
But I think TWKS could create a unique global delivery model thanks to its first-mover advantage, knowledge in modern software technology, and turn-key solutions.
Forecast
Based on my investment thesis, I expect TWKS to grow as guided for FY22, reaching $1.29 billion in revenue. However, given the global outlook for 2023, I expect growth to slow down in FY23 and recover in FY24, returning to 20%. Given the trend toward digitalization, I believe TWKS can continue to capture market share. All in all, I expect TWKS to generate $1.7 billion in revenue and $223 million in earnings in FY24. Assuming TWKS does that and trades at the same forward earnings multiple as today, it should be worth $12.05 in FY23.
Author’s estimates
Key risks
Wage inflation
At the very fundamental level, TWKS’ growth driver is a matter of how many talents it employs (i.e., the more talents it has, the more jobs it is able to process). As such, in the face of rising inflation and a strong labor market, I would not be surprised to see TWKS getting squeezed by rising wages. And if TWKS is unable to pay well, these talents can easily move on to the next consulting firm.
Global operations expose TWKS to operational and economic risk
A significant part of TKWS’s revenues (63% as of FY21) comes from international sales. TWKS’s growth strategy includes certain markets, the developing nature of which presents several risks, in particular labor, which could result in difficulties in staffing and managing foreign operations. A clear example is the use or availability of certain work visas, which could limit TWKS’ global delivery model.
Conclusion
TWKS is undervalued. TWKS is an international technology consulting firm that helps businesses adopt modern technology. The firm uses a multidisciplinary approach and focuses on trends such as AI and ML, immersive customer experiences, and privacy and security. All in all, I believe TWKS has expertise in helping businesses with organizational alignment and end-to-end capabilities in digital transformation, which should position them well to benefit from this secular uptrend.
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