EPAM has gotten torched over the last six months - since October 2024, its stock price has dropped 27% to $147.16 per share. This might have investors contemplating their next move.

Is there a buying opportunity in EPAM, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Even though the stock has become cheaper, we don't have much confidence in EPAM. Here are three reasons why you should be careful with EPAM and a stock we'd rather own.

Why Is EPAM Not Exciting?

Founded in 1993 during the early days of offshore software development, EPAM Systems (NYSE: EPAM) provides digital engineering, cloud, and AI transformation services to help global enterprises and startups modernize their technology systems and create digital products.

1. Declining Constant Currency Revenue, Demand Takes a Hit

Investors interested in IT Services & Consulting companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of EPAM’s control and are not indicative of underlying demand.

Over the last two years, EPAM’s constant currency revenue averaged 1.2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests EPAM might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, EPAM’s margin dropped by 6.7 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. EPAM’s free cash flow margin for the trailing 12 months was 11.1%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, EPAM’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

EPAM isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 13× forward price-to-earnings (or $147.16 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

Stocks We Would Buy Instead of EPAM

Donald Trump’s victory in the 2024 U.S. Presidential Election sent major indices to all-time highs, but stocks have retraced as investors debate the health of the economy and the potential impact of tariffs.

While this leaves much uncertainty around 2025, a few companies are poised for long-term gains regardless of the political or macroeconomic climate, like our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.