Globant S.A.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

Globant S.A. is a technology services provider, specializing in creating digital transformations for its clients. It offers IT services to companies seeking to integrate technology into their business operations, ranging from consulting and design to software development and support.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Globant’s revenue is mainly from providing a range of IT services to corporations, specifically helping them with the complexities of the digital revolution.

Business Overview Globant is a multinational technology company, primarily engaged in providing digital solutions and IT services. It was founded in Argentina in 2003 and has since grown to become a globally recognized player in the industry, serving a diverse set of clients spanning various sectors. The company’s core business centers around aiding organizations in their digital transformation journeys, helping them leverage technology to improve their business operations, customer engagement, and competitive positioning.

  • Revenue Streams: Globant derives its revenue primarily from providing services related to:
    • Digital transformation consulting and strategy.
    • Software development and engineering.
    • AI and data analytics solutions.
    • Cloud implementation and management.
    • Digital marketing and advertising technology solutions. Their revenue is primarily from time and materials and fixed-fee contracts with its clients. As of 2022, North America comprises 70% of their revenue and Latam, Europe and the Rest of the world contribute to the other 30%
  • Industry Trends: The digital transformation industry is rapidly evolving, with companies across sectors increasingly adopting new technologies to stay competitive. Key trends include:
  • Increased demand for AI-powered solutions.
  • More companies adopting cloud-first approaches.
  • Growing focus on cybersecurity and data privacy.
  • Focus on personalization and customer experience.
  • Continued expansion of the internet of things (IoT). The industry is fragmented because of the wide range of different business and different customer needs.
  • Margins: The average EBITDA margin is around 17-18%, while the average net profit margin is around 8-10%. This shows a strong profitability profile, and the company expects to maintain these levels going into the future.
  • Competitive Landscape: The technology services market is highly competitive and fragmented, including major global IT firms like Accenture, Infosys, Tata Consultancy Services, and regional competitors and niche players. Competitors are often selected based on reputation, scale, geographic location and skill sets. Most competitors offer similar services to Globant, therefore competition is intense and the company will need to outperform others and make itself unique to grab market share.
  • What Makes Globant Different: Globant’s main differentiator is its “digital transformation” expertise that is designed to improve the customer experience and increase sales of its clients. In addition, they try to understand each business deeply with their data and analytics capabilities, and provide very specialized solutions to their needs. Their company culture and a global outlook is also an important competitive advantage.
  • Newest Business Developments: As seen in their latest earnings calls, Globant is focused on incorporating AI into their offerings and seeing good initial traction on those. They are also heavily investing in developing their AI platform that will lead to more business and improved customer experience. They are also investing in studios for development work on metaverse and AI.

Financial Deep Dive

Globant’s revenue growth has been impressive. From 2019 to 2022, revenue has increased from $600 million to $1.7 billion (a ~45% CAGR).

  • Revenue and Profitability: Globant has demonstrated a track record of strong revenue growth, driven by increasing demand for its digital transformation services and a growing client base. The company’s financial statements show consistent increases in revenues across various geographies and industries. Furthermore, its margins are generally impressive with EBITDA in the 17-18% range which shows that its business model is profitable and scalable. However, they do note in the recent earnings call, that current margins may reduce temporarily due to current economic circumstances. Also, while net profit has been increasing YoY, it is also consistently much less than what it earns in operating profit, indicating high expenses (probably from R&D and salaries).
  • Balance Sheet: The company’s balance sheet is well-positioned with healthy levels of cash and cash equivalents. Their debt is relatively small, and that provides a low risk to the business and the flexibility to take on new opportunities. However, it should be noted that long-term debt has grown YoY, but it remains low to debt to asset levels that would not be concerning.

The amount of goodwill and intangibles is very large, and these are amortized every year. The company is also constantly acquiring new businesses, so this may cause issues in the future if the assets acquired don’t add value, as the value of the acquired business is primarily from intangible goodwill.

  • Cash Flows: Their cash flow from operations have been positive and improving over the last few years, which indicates the business’ ability to fund its operations without depending on external funding. In addition, they have shown good cash flows from financing, which shows the business is able to fund its expansion, investments and M&A activities, if needed.

Moat Analysis and Rating (2.5/5)

Globant’s moat is rated a 2.5 out of 5. Here’s a detailed justification:

  • Strengths:

    • Switching Costs: Globant often integrates deeply into its client operations, which can generate high switching costs. Once a company has invested heavily in Globant’s technologies and consulting, it becomes difficult and expensive to switch to another service provider. This effect creates some stickiness and makes it more likely clients will stay with Globant for the long-term. This is one of the main drivers of their success and they have a good track record of building this.

    • Intangible Assets: While not a pure moat, Globant’s intellectual property and proprietary processes that have a lot of know-how built up into them can help attract clients that know they will receive high quality service.

  • Weaknesses:

    • High Competition: Despite these strengths, the industry is highly competitive. Many companies offer similar IT services, and clients can switch to competitors for better pricing. Because of their large size, some competitors could also provide similar levels of quality, making them direct competitors of Globant and diluting the moats.

    • Technology Dependence: This has become one of their strengths in terms of integration with clients, but also a weakness in terms of that they rely on technology that is always evolving, and therefore it will always be threatened by faster and better technology.

  • Lack of Differentiation: While they brand themself as a digital transformation company and a company that understands businesses, its core offerings of IT services are similar to other competitors, therefore it can be hard for them to differentiate themselves.

Risks to the Moat and Business Resilience

  • Intense Competition: The most important risk to Globant is the level of competition, as competitors may aggressively cut prices to steal market share, causing revenues and margins to fall.
  • Technological Disruption: Due to constant developments in technology, the services the company offer may be disrupted or become obsolete, rendering existing skills and products less valuable.
  • Loss of Key Clients: The company is somewhat concentrated to a few major clients, and if any of those clients decide to change their technology provider, the business will be negatively impacted.

  • Macroeconomic Downturns: In periods of economic downturns, companies tend to spend less on tech-related spending and thus can heavily affect their business.

    • Currency Fluctuations: As more than a small portion of the company’s revenue comes from overseas, currency fluctuations can cause fluctuations in earnings if the company is not able to hedge them correctly.
  • High Goodwill and Intangibles: As mentioned before, goodwill and intangibles are a considerable part of the business, and these can be impaired if the company does not perform as well, leading to big losses.

Business Resilience

  • Geographic diversification: Globant has a presence in multiple countries and that should be seen as a benefit to mitigate the risks associated with operating in only one market or geographic area.
  • Industry Diversification: They serve a variety of industries, which makes them more resilient to slowdowns in one particular market or sector.

Understandability Rating: 3 / 5

  • The core of the business is simple to understand, providing software/technology services to companies. However, their strategy and how they make themselves unique can be hard to understand for someone new to the industry. Their business model and how it creates a moat also requires more deep dives and is not readily understandable. The underlying technology may be hard to understand for some non-technical investors. The way they present their financials also have a good mix of complex accounting terms and simpler methods that require an understanding to make accurate judgements.

Balance Sheet Health Rating: 4 / 5

  • The balance sheet for the company is pretty healthy. They have a high liquidity level due to their large cash reserves and low debt. Their debt has also remained stable compared to previous years, although it has increased slightly in the latest quarter. A small amount of debt also indicates higher financial stability and flexibility. One negative aspect is the high amount of goodwill, which must be reviewed carefully to avoid future impairments.

Recommendations

Globant is a company with good long-term potential and with reasonable resilience due to its diversity. It does have a few potential risks, such as strong competition and technological obsolescence and investors must keep track of those. However, its strong revenue growth and reasonable profits make it a decent stock for investment. It is most suited for investors who don’t mind a reasonably higher-risk profile and a good dose of uncertainty.