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Tuesday saw Piper Sandler reaffirm its Overweight rating and $225.00 stock price target for EPAM Systems (NYSE:EPAM), despite reservations about the company's recent acquisition moves. EPAM's purchase of First Derivative has raised several concerns for the analyst firm, primarily due to the potential integration challenges that often accompany large-scale acquisitions within the IT Services sector.
The analyst pointed out that while the acquisition could grant EPAM deeper industry capabilities, there are significant risks involved. The size of the acquisition poses a substantial integration risk, the margins from First Derivative are considered dilutive, and the company's inclination towards an onsite service model in a market sensitive to price could hinder growth prospects.
Amidst these concerns, EPAM's management is currently restricted from providing detailed information due to a quiet period. However, stakeholders are encouraged to look for clarity from the company during its third-quarter earnings report. The focus will be on EPAM's justification for its increased M&A activity, which includes approximately $930 million spent on Neoris and First Derivative acquisitions.
Analysts are particularly interested in understanding EPAM's confidence in navigating large deals and maintaining its growth trajectory. They seek insight into whether EPAM can achieve mid-to-high teen growth by the fiscal year 2025, with M&A contributing 11% to this growth, as per the analyst's calculations. Additionally, there is anticipation around whether EPAM will now consider M&A a fundamental part of its long-term growth strategy.
In other recent news, EPAM Systems has been making strategic moves with the acquisition of First Derivative and NEORIS. TD Cowen maintained a Hold rating on EPAM Systems following the acquisition of First Derivative, a firm with revenues of £170 million for the fiscal year ending in February 2024. This acquisition is expected to contribute approximately five percentage points to EPAM's annualized revenue growth. However, the lower margin profile of FD's diversified services raises some concerns.
On the other hand, the acquisition of NEORIS, a global technology consultancy firm, is expected to enhance EPAM's delivery capabilities across Latin America and Europe. Despite concerns about the size of the acquisition and potential integration challenges, Piper Sandler maintained its Overweight rating on EPAM Systems.
In terms of financial performance, EPAM Systems reported a decrease in its 2024 organic CC revenue forecast, leading to Mizuho Securities lowering its stock price target. Despite the downward revision in revenue guidance, Mizuho continues to see a positive future for EPAM Systems. These are recent developments that investors should consider.
InvestingPro Insights
As EPAM Systems navigates its recent acquisitions and the associated challenges, InvestingPro data and tips provide additional context to the company's financial position and market performance.
According to InvestingPro data, EPAM's market capitalization stands at $10.99 billion, with a P/E ratio of 27.14. The company's revenue for the last twelve months as of Q2 2024 was $4.62 billion, although it experienced a slight revenue decline of 4.5% during this period.
An InvestingPro Tip highlights that EPAM "holds more cash than debt on its balance sheet," which could be crucial as the company integrates its recent acquisitions and manages potential financial risks. This strong liquidity position is further supported by another tip indicating that EPAM's "liquid assets exceed short-term obligations."
Despite the concerns raised by Piper Sandler regarding the recent acquisitions, an InvestingPro Tip notes that "analysts predict the company will be profitable this year." This projection aligns with the company's track record, as another tip mentions that EPAM has been "profitable over the last twelve months."
It is worth noting that EPAM's stock "has taken a big hit over the last six months," according to an InvestingPro Tip. This observation is consistent with the article's focus on the company's recent challenges and market uncertainties.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for EPAM Systems, providing a deeper understanding of the company's financial health and market position.
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