A stock is undervalued if its value is higher than its current trading price. The larger the gap between the intrinsic value and the share price, the more undervalued or overvalued the stock is considered to be.
In the case of Globant, the company’s share price has fallen by over 70% year-to-date, bringing its market capitalisation close to where it was roughly seven years ago. Although the stock’s value has also declined during this period, it is not proportionate to the drop in share price. Simply put, Globant is undervalued because a stock does not need to continually grow in value to be undervalued, if its price drop is significantly more pronounced.
So, why did the company’s share price tank significantly? The largest drop in share prices occurred after the announcement of its FY2024, 1QFY2025 and 2QFY2025 results. Some of the key factors that drove the share price down include reduced spending in the IT services industry, geopolitical headwinds, particularly tariffs, and dampened profit and margin guidance. It must be said that Globant had some tailwinds supporting a brighter outlook for the company; however, the key question is: Do the headwinds justify a 70% drop in Globant’s market capitalisation?
Globant’s business model primarily focuses on discretionary IT services. Generally, the more discretionary a product or service is, the more volatile its revenue and profits tend to be. However, some headwinds for Globant include the better medium to longer-term outlook, as the recent global pullback in discretionary IT spending has adversely affected most companies in the industry. Given the company’s growth and projected growth in revenue and market share, it should be able to capture a reasonable share of the total addressable market for its niche. By 2028, according to IDC and Gartner, the total market for generative AI is expected to reach a five-year CAGR of 73.5% while half of the US$7.4 trillion ($6.1 trillion) overall IT spending is expected to be in the software and services markets, both of which are expected to impact Globant positively.
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Big brand with big clients
Furthermore, the company is also a well-recognised brand in the industry, with clients such as Disney, Electronic Arts, Unilever, Adidas and Google. The key factor that could potentially turn the tide for this company is its AI venture and business solutions. One initiative from the company to gain a competitive edge in the AI sphere is its Agile pods, which are dedicated delivery units that harness the power of autonomous AI agents, by covering the agentic software development, process compass and service support, which ultimately allows it for unlimited scalability, significant workload efficiency gains, and real-time control and visibility over its outputs.
Additionally, Globant is actively seeking strategic acquisitions to expand its intellectual footprint globally. Last year, the company acquired Exusia, which is an AI digital transformation company that specialises in full lifecycle AI, data engineering, cloud migration, and analytics. Shortly after, Globant acquired Blankfactor, an IT services consulting firm specialising in delivering consulting-led product engineering, data engineering, and enterprise AI solutions.
Some standout statistics from Globant’s most recent 2QFY2025 results include a 28.3% CAGR for its 10-year revenue and a growth in employees from over 16,000 in 2020 to over 30,000 this year. Specifically, since it was mentioned that Globant’s market capitalisation was the same as it was seven years ago, the average revenue of its top 10 clients grew from US$23 million in 2018 to US$71 million in this period. For smaller contracts with revenues over US$1 million, the total number of clients grew from 90 to over 340 within the same period. These are supporting factors that enable the business to continue evolving.
In terms of financials, Globant has achieved nearly 10 years of positive and consistently growing revenue, net income, operating cash flow, and free cash flow (see Chart 1). Profitability-wise, the company’s most recent adjusted gross profit margin and adjusted operating profit margin are relatively robust at 38.1% and 15.0% respectively.
For its financial health, the company maintains a healthy balance sheet, with liquidity and solvency issues unlikely to affect it, both in the short- and long-term period. Globant has a current and quick ratio of 1.71 and 1.46 times, respectively, which is well above the benchmark of one time. Additionally, the company has a net debt-to-equity ratio of 16.6%, with an interest coverage of over four times. Furthermore, with an Altman Z-score of 5.4, the company is financially healthy, as it exceeds the benchmark of 3. Additionally, its debt is rated as investment grade, with a very low probability of default.
‘Cheap’ compared to peers
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In terms of relative valuation, Globant is “cheap” compared to global peers. The stock is trading at a steep 51%, 50% and 73% discount for its forward P/E, forward EV/Ebitda and forward P/B ratio, respectively. Regionally, the company trades at a 40%, 31% and 62% discount for the same metrics, respectively. This indicates that Globant is a more attractive option compared to its peers in the same industry.
Sentiment-wise, there are 14 “buy” calls, seven “hold” calls and no “sell” calls for Globant from analysts, with an average target price of over 65% above its current trading price of US$57.38 over the next 12 months. Based on a methodology that involves multiple types of valuations (see Charts 2a and 2b), we believe the fair value of the company is US$89.23, which is over 50% higher than its current trading price.
On Oct 1, Bloomberg reported that Globant’s board has approved a US$125 million share buyback programme, or US$50 million per quarter. Share buyback programme are popular with some investors because they provide price support by enhancing return on equity and earnings per share.
For Singapore investors seeking to purchase this stock, they may do so without much hassle through their international trading account, as this company is a mid-cap US stock listed on the New York Stock Exchange.
Disclaimer: This article is strictly for information purposes only and does not constitute a recommendation or solicitation, or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This article does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be made at the investor’s own discretion and/or after consulting licensed investment professionals, at their own risk. The author of this article does NOT hold or own the stock featured in this article or have a vested interest in it at the time of writing.
