EPAM Systems, Inc. (EPAM) in Newtown, Pa., provides digital platform engineering and software development services worldwide. The company recently delivered a solid first-quarter earnings report in which its revenues and non-GAAP EPS beat the Street’s estimates by 13.6% and 31.7%, respectively.
However, EPAM is expected to be impacted by unfavorable foreign currency exchange rates in the coming quarter.
The stock has declined 24.8% in price over the past three months and 52.9% year-to-date to close yesterday’s trading session at $314.66. In addition, it is currently trading 56.6% below its 52-week high of $725.40, which it hit on Nov. 5, 2021, due to a potential business disruption caused by Russia’s invasion of Ukraine, where many of its employees are based. So, EPAM’s near-term prospects look uncertain.
Here is what could influence EPAM’s performance in the upcoming months:
Solid Financials
EPAM’s revenues surged 50.1% year-over-year to $1.17 billion for its fiscal first quarter, ended March 31, 2022. In addition, its non-GAAP income from operations grew 37.8% year-over-year to $188.70 million. The company’s non-GAAP net income came in at $147.04 million, representing a 38.5% year-over-year increase. Also, its non-GAAP EPS was $2.49, up 37.6% year-over-year.
Low Profitability
In terms of trailing-12-month gross profit margin, EPAM’s 33.83% is 32.7% lower than the 50.29% industry average. Likewise, its 8.91% trailing-12-month levered FCF margin is lower than the 9.13% industry average.
Stretched Valuation
In terms of forward non-GAAP P/E, EPAM’s 36.85x is 101.8% higher than the 18.26x industry average. Also, its 23.21x forward EV/EBITDA is 92.5% higher than the 12.05x industry average. Furthermore, the stock’s 6.36x and 26.66x respective forward P/B and EV/EBIT are higher than the 3.86x and 15.61x industry averages.
Unfavorable Analyst Estimates
Analysts expect EPAM’s EPS to decrease 16.6% in the current quarter, 17.4% in the next quarter, and 5.2% in the current year.
POWR Ratings Do not Indicate Enough Upside
EPAM has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. EPAM has a D grade for Value, in sync with its higher-than-industry valuation ratios.
The stock has a D grade for Stability, which is consistent with its 1.78 beta.
EPAM is ranked #49 among 81 stocks in the C-rated Technology - Services industry.
Click here to access EPAM’s ratings for Growth, Momentum, Sentiment, and Quality.
Bottom Line
EPAM could continue retreating in the near term on concerns over operational challenges caused by Russia’s invasion of Ukraine. So, we think the stock looks overvalued at the current price level, and it could be wise to wait for a better entry point in the stock.
How Does EPAM Systems (EPAM) Stack Up Against its Peers?
While EPAM has an overall POWR Rating of C, one might want to consider investing in the following Technology - Services stocks with an A (Strong Buy) rating: Fujitsu Limited (FJTSY), Computer Task Group, Incorporated (CTG), and Celestica, Inc. (CLS).
EPAM shares were trading at $303.78 per share on Tuesday morning, down $10.88 (-3.46%). Year-to-date, EPAM has declined -54.55%, versus a -17.94% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.
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