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Digital Transformation Public Valuations

As companies mature and become larger, there could be less interest in exiting via M&A, not only because there could be fewer players of the appropriate size to acquire the business, but also because shareholders may continue to see value in scaling the business and remaining independent.

In these cases, the public markets become a suitable alternative for partial shareholder liquidity. As a public company, the company's shares are traded constantly, and therefore overall valuation is defined on an ongoing basis. As I've mentioned, before, the company is for sale every day!

Our focus on investing in technology services businesses makes looking at publicly-traded digital transformation companies interesting. These technology companies are not focused at the hardware nor the software layer, but centered around technology services like custom software product development, cloud engineering, software implementation, etc.

Ordered by market capitalization size, we have selected the following companies to do a quick valuation exploration: EPAM, Globant, Endava, Thoughtworks, CI&T, Grid Dynamics and AgileThought. The image below shows the results of the quick study (bubble size reflects the relative market cap among these players).

Screen Shot 2022-12-16 at 2.33.53 PMThe labels of each bubble inform the ticker symbol of the company, it's 2022 Revenue Growth rate, and it's EV/2022 Revenue Multiple. For example Globant is growing at 37% annually and is valued at approximately 3.8x 2022 Revenue, while CI&T is growing at 40% and valued at 2.1x sales. Globant is 8 times larger than CI&T in market cap, and has estimated 2022 revenue of $1.8 billion, while CI&T has an estimated 2022 revenue of $0.4 billion. 2022 revenue ranges for these companies goes from EPAM, the largest, at approximately $4.8 billion, to AgileThought at approximately $0.2 billion.

We did not draw a regression line on this chart, but the quick analysis can point to a directional "up and into the right" (from lower left quadrant to the upper right quadrant of the chart) correlation between valuation and growth. The higher the growth, the more deserved higher valuation a company would tend to have (all else being equal).

Not all tech services companies are the same and valuations reflect additional company parameters that are not included in this simple examination. Other company-specific parameters that complete this financial picture could include, type of revenue, quality of revenue, diversification, industries served, services rendered, geographical footprint, profitability levels, etc.

If you find this information useful please reach out to us to start to build a relationship. Our focus is to invest in technology services companies with North America revenue and global operations.