EPAM Systems: A Significantly Undervalued Tech Gem?
Despite a daily gain of 1.81% and an Earnings Per Share (EPS) (EPS) of 9, EPAM Systems Inc (NYSE:EPAM) has seen a 3-month loss of 7.56%. Is the stock significantly undervalued? This article delves into the valuation analysis of EPAM Systems, offering insights that could guide your investment decisions.
Company Overview
EPAM Systems Inc provides a range of software product development and digital platform engineering services to clients worldwide. The company's offerings include Software Product Development, Custom Application Development, Application Testing, Enterprise Application Platforms, Application Maintenance, and Infrastructure Management. EPAM Systems focuses on innovative and scalable software solutions, primarily catering to industries such as financial services, travel, consumer, software and hi-tech, life sciences, and healthcare. The majority of its revenue is generated from North American clients.
With a current share price of $244.79, EPAM Systems has a market cap of $14.20 billion. Comparatively, the GF Value, an estimation of the company's fair value, stands at $592.16. This discrepancy paves the way for a deeper exploration of the company's intrinsic value.
Understanding the GF Value
The GF Value represents a stock's current intrinsic value, derived from a proprietary method. The GF Value Line provides an overview of the stock's fair trading value, calculated based on historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future business performance estimates.
If the stock price is significantly above the GF Value Line, it indicates overvaluation and likely poor future returns. Conversely, if the stock price is significantly below the GF Value Line, the stock may be undervalued, implying potentially higher future returns. Given EPAM Systems' current price of $244.79 per share and a market cap of $14.20 billion, the stock appears to be significantly undervalued.
As EPAM Systems is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, reviewing a company's financial strength is crucial before deciding to buy shares. EPAM Systems has a cash-to-debt ratio of 10.22, which ranks better than 65.85% of 2750 companies in the Software industry. Based on this, GuruFocus ranks EPAM Systems's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. EPAM Systems has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.80 billion and an Earnings Per Share (EPS) of $9. Its operating margin is 12.72%, which ranks better than 78.42% of 2720 companies in the Software industry. Overall, GuruFocus ranks the profitability of EPAM Systems at 10 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. EPAM Systems's 3-year average revenue growth rate is better than 82.67% of 2389 companies in the Software industry. EPAM Systems's 3-year average EBITDA growth rate is 19.8%, which ranks better than 66.73% of 1990 companies in the Software industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, EPAM Systems's ROIC is 24.03 while its WACC came in at 13.53.
Conclusion
In summary, EPAM Systems appears to be significantly undervalued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 66.73% of 1990 companies in the Software industry. To learn more about EPAM Systems stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
