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1 Potential Long-Term Winner Nobody Is Talking About

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Strong business fundamentals are positioning Endava for long-term success.

Tech stocks have taken a beating over the past three months. Such market downturns can be scary for investors, but they also present timely opportunities to invest in great businesses at relatively discounted prices. One such business that investors may be overlooking is Endava (DAVA -3.93%), a budding IT consulting company based in the U.K. Endava may not be a household name, but here are three reasons why getting familiar with this business may reward long-term investors handsomely. 

The tide of digital transformation is lifting Endava's boat high

After gaining valuable experience in the business consulting industry, CEO John Cotterell founded Endava in 2000. Since then, the company has become a prominent technology service provider helping businesses adopt modern technologies to acquire more customers, grow revenue, and reduce costs through automation. Among other success stories:

  • Endava helped a major international airline with over 100 million customers to grow and retain revenue by creating engaging web and mobile experiences, and building key features such as searching for airfares, planning travel, and managing personal profiles.
  • Endava automated the quote generation process to reduce the turnaround time and cost for a worldwide insurance provider, by making a simple web application for customers.  

Image source: Getty Images.

In today's digital-first world, Endava is helping businesses become more competitive. According to market research firm IDC, the total investments in global digital transformations are expected to reach $6.8 trillion in 2023, growing 15.5% per year from 2020. At its current revenue of around 446 million pounds ($586 million), Endava has a very long runway in front of it.

A scalable business model and deft execution are driving growth

People are at the heart of the IT consulting business. Endava began building its workforce strategically in a few central European countries, where IT talent was untapped and available at a relatively cheaper cost. The company made a concerted effort to build an aspirational brand to attract smart workers. With its talented workforce, Endava delivered high-quality work for its clients, who, in turn, continued to feed the company more work, creating a virtuous business cycle. 

Another notable feature of Endava's business is its nearshore outsourcing model, which focuses on building its offices and hiring workers from locations that are geographically closer to its clients. Staying in the same or nearby time zones allows Endava's employees to overlap work hours with their clients, and enables timely interactions. Being from closer geographies also means Endava's workers have a greater familiarity with the social, cultural, and business environments of its clients.

Nearshoring has led to higher productivity and customer satisfaction. As of December, Endava has extended this approach with over 10,000 employees working from 48 cities in 23 countries across Europe, Latin America, and North America. 

Endava's high-quality work has resulted in building an impressive list of prestigious clients such as Bain & Company, BBC, and Volkswagen. Client count has been growing, and top clients continue to spend more and more money with Endava.

Data source: Company financial statements.

Endava has built enduring partnerships with its clients, who continue to reward Endava with more and more work. Over the last five years, on average, existing clients contributed to 88.5% of Endava's revenue for each fiscal year. With such a tremendous reputation and repeat business from existing clients and steady addition of new clients, Endava has compounded its revenue at a very impressive annual growth rate of 29.4%.

Data source: Company financial statements.

Endava has achieved this impressive growth while being profitable each of the past five years. The company's profit margin of 14.4% in the first six months of its fiscal 2022, which ended in December 2021, underscores Endava's scalable business model. Endava's adjusted cash flow margin of 15.6% during the same period also confirms that the company has no problem paying its bills. 

A couple of things to keep in mind before taking the plunge

Every business has risks, and Endava is not an exception. First, the ongoing war between Russia and Ukraine may further affect businesses across the globe, especially in Europe. As of the end of 2021, Endava didn't generate any revenue from Russia, Ukraine, and Belarus, and the company has no employees based in those countries. So the risk for Endava is contained at this point, but investors should keep a close eye on the ongoing conflict in Europe.

It is also important to note that Endava generated 35% of its revenue for the first six months of fiscal 2022 from its top 10 clients. Although that percentage has gone down from 49% in 2017, it still represents a high revenue concentration and would affect the company's sales materially if one of those clients were to terminate its relationship with Endava. Endava should continue to diversify its revenue.

Finally, IT consulting is a crowded field, and Endava faces stiff competition from fast-growing rivals such as EPAM and Globant, as well as well-established giants like Accenture. The company will have to execute flawlessly to realize its opportunity.

A scalable business model, outstanding execution driving profitable growth, and strong tailwinds of digital transformation make Endava an enticing opportunity for investors. Along with the broader sell-off in tech stocks, as of this writing, Endava's shares are down by over 20% from their all-time high in December 2021. Now could be a good time for long-term investors with diversified portfolios to take a small position in Endava.

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