On Friday, Citi downgraded shares of Endava PLC (NYSE:DAVA), a global technology company, from Buy to Neutral. The firm also significantly reduced the price target for Endava's stock to $40 from the previous $90. This adjustment follows Endava's announcement of an approximate 9% reduction in their revenue expectations.
The downgrade was prompted by the realization that Endava's financial estimates were overly optimistic, as the company's recent performance did not meet these forecasts. Citi noted that past misses in expectations by Endava were due to unforeseeable events, such as activist-led cost cuts at a major client or repercussions from a forced merger involving a large bank. However, the current situation suggests that Endava's limited diversification, particularly its focus on the FinTech sector, which is currently facing challenges, is a significant concern.
Citi's analysis pointed out that while Endava is modifying its approach to providing financial outlooks, the firm still tends to have a positive bias. The recent acquisition of the India-based company GalaxE aims to address the issue of diversification but introduces new risks associated with mergers and acquisitions integration. Additionally, there is concern that client demands for lower price points, especially in markets like India, could lead to further unexpected negative outcomes.
The revised price target of $40 reflects both a reduction in expected financial performance and a lower confidence level in the company's ability to manage the risks mentioned. Citi's decision to downgrade Endava to Neutral from Buy is based on the need for a rebuild in confidence regarding the company's ability to mitigate these emerging risks.
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