The dark clouds of the macro environment continue to cast shadows over investors' optimism. The stock market, and in particular tech stocks, have been under pressure for about 12 months now, and the future for this space remains as uncertain as ever.
While the investing landscape may look a little gloomy, patient investors willing to look beyond a few quarters have some intriguing prospects in front of them. One such opportunity is Endava(NYSE: DAVA), an IT consulting company based in the United Kingdom.
Since its foundation in 2000, Endava has been helping businesses adopt modern technologies to become more competitive. With its deep expertise in areas of high demand such as software engineering, consumer experience, cloud, and data and analytics, Endava has become a trusted technology services provider. The company established its roots in the U.K. and has steadily expanded its services across Europe, North America, and other parts of the world.
Let's see why investing in this steady performer now could produce handsome rewards for investors.
Endava isn't immune to economic pressures
Endava reported solid results for its second quarter of fiscal 2023 (ending on Dec. 31, 2022). Revenue jumped 30% year over year to 205.2 million pounds (about $255 million). Free cash flow (FCF) came in at 37 million pounds (about $46 million) relative to 31.2 million pounds (about $39 million) for the same period last year.
While Endava's results looked good, analysts and investors were primarily focused on what lies ahead. Endava's guidance of 14% to 15% revenue growth for the upcoming third-quarter fiscal year 2023 fell short of expectations, and Endava's stock dropped roughly 13% in the next trading session after the report.
Image source: Getty Images.
Businesses around the world are feeling the strain of the slowing economy and aggressively cutting costs. Endava CEO John Cotterell said in the earnings call that its customers are reassessing their spending priorities and adding another level of due diligence in their decision-making process, making the sales cycle longer. This is consistent with the broader tech sector.
Although Endava isn't immune to the challenges posed by the current macro environment, Endava's services are still highly valuable for its clients. For example, Endava helped British semiconductor company Arm, increase delivery speeds and reduce costs through the use of cloud computing. In another example, Endava helped several European banks build their web and mobile presence, and automate back-office operations for efficiency.
These are important initiatives that companies will continue to value. However, the economic reality is pressing Endava's clients to manage their spend closely. As such, Endava's growth over the next few quarters may not look as stunning as what the investors have gotten used to.
But it's temporarily murky times like these that present long-term investors with significant opportunities to profit.
Endava has strong fundamentals
Since the end of fiscal year 2018 through the second quarter of fiscal year 2023, Endava has grown its number of clients from 258 to 703. For the same period, the number of customers paying over one million pounds has gone up from 46 to 156. And just in the last 12 months, that lucrative client pool increased by 46%. Average spending of its top 10 clients is on track to more than double by the end of FY 2023 compared to FY 2018. With that said, it's no surprise that Endava has grown its revenue at a very impressive compound annual growth rate of 32% from FY 2018 through FY 2022.
Endava achieved that impressive growth all while expanding its profitability. Its profit margin has expanded from 10.6% in FY 2018 to 14.6% in FY 2022. The company is also turning 14.6% of its revenue to free cash flow as of the past quarter. And Endava had a strong cash position of 186 million pounds as of the end of the past quarter, which will allow it to not only survive but thrive via organic growth and acquisitions, as its smaller competitors are likely to struggle in a tough environment.
With its savvy and responsible fiscal execution, Endava has also quadrupled its free cash flow per share.
DAVA Free Cash Flow Per Share data by YCharts
Looking at just a few quarters can often skew investors' perception of a company's performance. Monitoring performance over a broader time horizon and placing the current performance in the context of the macro environment can provide much-needed clarity. Looking at Endava's consistent and profitable growth, it's no surprise that the company has crushed the S&P 500 index over the past five years (return of 143% versus the S&P 500's 57%). And with its strong brand and outstanding execution, Endava's winning streak is likely to continue.
Its valuation is favorable for investors
With an over 50% drop in its shares over the past 12 months, Endava's shares are trading at a price-to-free cash flow valuation of 25.6, close to their lowest valuation over the past five years.
Endava projects its global addressable market to be a massive $3.4 trillion. The IT services market is highly competitive, but just a tiny sliver of that opportunity could mean huge rewards for investors. Current economic conditions are certainly challenging, but with its experience over the past two decades Endava has proven that it can navigate those difficult situations.
For investors willing to withstand near-term volatility, now may be an excellent time to buy shares of Endava.
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Kaustubh Deshmukh (KD) has positions in Endava Plc. The Motley Fool has positions in and recommends Endava Plc. The Motley Fool has a disclosure policy.
