It's natural for investors to gravitate toward businesses that they interact with in daily life. But ignoring the rest entirely could mean missing out on some highly lucrative opportunities.
One that not many U.S. investors will have heard of is Endava (DAVA -0.13%), a U.K.-based IT consulting company. Since it went public in 2018, Endava has stacked excellent results quarter after quarter. Here's why that performance is likely to continue and why now may be a great time to buy shares of this under-the-radar winner.
High-quality service, trusted brand, and smart business strategy
Endava helps businesses adopt next-generation technologies and become more competitive in today's digital-first world. With its expertise in various industries -- such as payments, fintech, media, retail, and many others -- coupled with its world-class engineering skills and broad functional capabilities ranging from business strategy to consumer experience to operations, Endava's goal is to help clients increase revenue and profits while operating more efficiently.
Image source: Getty Images.
In one of its success stories, Endava partnered with Arm -- the U.K.-based semiconductor and software giant -- to migrate its digital workloads to the cloud and streamline its Agile development process. In another example, Endava helped a global insurer improve its customer experience and boost revenue with a new web design and optimization of onboarding and claims processes.
Endava's high-quality work has helped it build a trusted brand and steadily grow its client base. That strong reputation has attracted top talent to the company, which is central to the success of a consulting company. And Endava's "nearshoring" workforce strategy has differentiated its services from its rivals. As part of this strategy, Endava hires workers from locations that are geographically closer to its clients. Having staff in the same or nearby time zones allows Endava's employees to overlap work hours with its clients, and enables timely interactions. Being from closer geographies also means Endava's workers are more familiar with the social, cultural, and business environments of its clients.
Overcoming obstacles to deliver consistent results
With its disciplined execution, Endava has produced consistent results since its foray in the public market. The company has grown its total customers steadily from 258 in its fiscal 2018 to 732 in fiscal 2022 (which ended in June). And its established customers are spending more money with the company each year. For the same period, the average amount spent by Endava's customers per year on its consulting services went up from 597,000 British pounds ($719,000) to 841,000 British pounds ($1.01 million). And the number of large accounts -- customers spending more than 1 million British pounds annually -- has grown from 46 to 134.
As its customers reward Endava with more business, its revenue has grown at an impressive compound annual rate of 31.7% from fiscal 2018 through fiscal 2022. It's quite remarkable that the company was able to accomplish that growth amid the challenges of the COVID-19 pandemic. And it didn't require the company to sacrifice its profitability -- Endava has been in the black every year since it went public.
The company's recently reported fiscal Q1 2023 was consistent with what investors have come to expect from it. Despite a slowing economy, high inflation, and rising interest rates, Endava reported year-over-year revenue growth of 33% (26% in constant currency) to 196 million British pounds. Its pre-tax profit margin stayed strong at 19.7%, and its free-cash-flow margin was 11.1%, in line with the prior-year period's result.
Endava has handsomely rewarded its long-term investors with returns of more than 195% since its IPO, handily beating the S&P 500's total return of about 42% over the same period.
Poised to win going forward
Endava earns about 62% of its revenue from Europe, and about 80% of its employees are based there. The ongoing war between Russia and Ukraine continues to be a risk to the region. The U.K. and many European countries are also struggling with high inflation and tough economic conditions. These factors certainly pose near-term challenges to Endava's business performance.
To the company's credit, however, it has deftly navigated those issues so far. With its excellent track record of success, Endava has passed its higher costs on to its customers by increasing its pricing. The company continues to see strong demand for its services, and is projecting revenue growth in the range of 23% to 24% (constant currency) for fiscal 2023.
Endava sees a total market opportunity of $1.8 trillion for its services. The company has been systematically growing its global exposure beyond Europe and is also expanding into newer industry verticals. Endava is still in its early stages and has a long runway ahead of it.
Shares of Endava are down by about 56% this year amid concerns around the economy and the overall pessimism about the tech sector.
DAVA PE Ratio data by YCharts
It is quite possible that the shares may continue to be volatile in the short term. But with the stock trading close to its all-time low valuations in terms of its price-to-earnings and price-to-free-cash-flow ratios, now may be an excellent time for long-term investors to find a place for this under-the-radar market-beater in their portfolios.
