Company Reports

We’re cutting our Endava fair value estimate to $42 from $62 after reviewing fourth-quarter results and fiscal 2025 guidance. We’ve dropped our long-term revenue CAGR to 9.7% from 13.6% and trimmed our margin estimates modestly. We maintain our narrow moat rating. Despite the significant haircut to our estimates and fair value estimate, shares continue to look undervalued.

Endava, based in the U.K., is an IT services company focused on providing digital transformation and engineering services. It generates revenue mainly by charging clients on a time and materials basis for services such as consulting/advice, customized software development and integration, and quality assurance and testing. Endava is highly exposed to the financial services sector, with nearly half of its revenue generated from the sector. Within financial services, Endava is known for its expertise in payments and private equity.

Narrow-moat Endava reported third-quarter results and guidance broadly in line with our expectations, which sent shares up over 10% in early trading. Following the acquisition of GalaxE, Endava now expects fiscal-year 2024 revenue of GBP 741 million-GBP 743 million, representing a constant-currency decline of between 4.5% and 4% versus fiscal 2023, and adjusted diluted EPS to be GBP 1.13-GBP 1.14. As we noted last quarter, amid serious doubts over the path of revenue recovery following their slashed outlook for the year, Endava needs several quarters of positive results to regain investor confidence. With no expected changes to forecasts, we maintain our fair value estimate of $62, and we see the shares as undervalued.

Narrow-moat Endava shares declined 42% on a weak outlook, and it announced the acquisition of GalaxE Solutions, the largest in Endava's history ($405 million or 10% of the market cap). We’ve cut our fair value by 20% to $62, primarily due to reducing our revenue growth forecast. We’ve delayed our expected cyclical recovery to fiscal 2025 (June year-end) from fiscal 2024. Excluding the GalaxE acquisition, we now expect five-year revenue growth CAGR of 8.9% versus 13.8% previously. We see the GalaxE acquisition as broadly neutral to our valuation. Overall, we think the market has overreacted, with shares trading at a 40% discount to our fair value estimate. However, with serious doubts over the path of revenue recovery now, several quarters of positive results will be needed to regain investor confidence.

Endava, based in the U.K., is an IT services company focused on providing digital transformation and engineering services. It generates revenue mainly by charging clients on a time and materials basis for services such as consulting/advice, customized software development and integration, and quality assurance and testing. Endava is highly exposed to the financial services sector, with nearly half of its revenue generated from the sector. Within financial services, Endava is known for its expertise in payments and private equity.

We're initiating coverage on two narrow-moat information technology services companies that specialize in digital transformation services. We think narrow-moat Globant is fairly valued with a $201 fair value estimate. In contrast, we think narrow-moat Endava is undervalued with a $77 fair value estimate, which puts the stock in 4-star territory. Endava is enduring a larger growth downturn than Globant in the current challenging environment given its high exposure to private equity, which we think has caused investors with a short investment horizon to sell the stock.

Endava, based in the U.K., is an IT services company focused on providing digital transformation and engineering services. It generates revenue mainly by charging clients on a time and materials basis for services such as consulting/advice, customized software development and integration, and quality assurance and testing. Endava is highly exposed to the financial services sector, with nearly half of its revenue generated from the sector. Within financial services, Endava is known for its expertise in payments and private equity.