Clarivate vs. EPAM Systems: Which Beaten-Down IT Services Stock is a Better Buy?

Information Technology (IT) services utilize technology and business expertise to enable companies to create, manage, and optimize the information and working processes.​ Since the onset of the pandemic, the IT services industry has been experiencing high demand across the globe. 

According to Research and Markets, the global IT services market size is estimated to reach $1123.57 billion, growing at a CAGR of 8.02% between 2021 and 2026. The growing demand for cloud-based solutions and the rising trend towards business processes automatization will continuously stimulate demand for IT services. Therefore, companies that provide IT services should benefit in the long term. 

With this in mind, today I’ll analyze and compare two beaten-down IT services stocks, Clarivate Plc (CLVT) and EPAM Systems, Inc. (EPAM), to determine which stock currently presents a better investment opportunity.  

Based in London, Clarivate is an information service and analytics company that offers various software solutions, providing customers with structured information and analytics for the discovery, protection, and commercialization of scientific research, innovations, and brands. Founded in 1993, EPAM Systems is an IT services company that offers digital platform engineering and software development solutions, serving the financial services, travel and consumer, software and hi-tech, business information and media, life sciences, and healthcare organizations worldwide. 

Year-to-Date (YTD), both CLVT and EPAM stocks have both plunged about 30%. 

Recent Developments 

On February 3rd, Barclays analyst Manav Patnaik downgraded Clarivate to "Equal-Weight" from "Overweight." The analyst noted that a lower company's 2022 revenue and EPS guidance implies lower multiplies, causing the downgrade. The firm also decreased its price target on Clarivate to $16 from $25. However, the company recently approved a $1 billion share buyback program, which might support its share price over the long term. 

On December 14th, EPAM Systems announced that it had acquired Optiva Media, a niche professional services firm that offers product development and digital services to leading media companies, to expand its presence in  Western Europe and Latin America. The company's President of EU and APAC Market Balazs Fejes said, "The combination of EPAM's digital technology and product engineering expertise with Optiva Media's platforms and accelerators will create a complete and valuable end-to-end delivery capability in the media and entertainment space."

Recent Financial Performance & Analysts Estimates

Clarivate Plc revealed its‌ ‌most recent earnings ‌report‌ on ‌Thursday,‌ ‌October 28th. In Q3, the company’s total net revenues increased 55.5% year-over-year to $442.12 million. However, CLVT missed the Wall Street revenue estimates by $4.58 million. Clarivate's subscription revenues have been reported 11% higher YoY at $246.47 million, while its transactional revenues increased 33% YoY to $85.35 million. The company also recognized recurring revenues of $110.37 million due to acquisitive growth generated from the CPA Global Transaction.

Moreover, the company's net income stood at $23.31 million, compared to a year-ago net loss of $181.99 million. As a result, its third-quarter Non-GAAP EPS was $0.16, standing in line with consensus. However, Clarivate's Annualized Contract Value, which represents the annualized value for the next 12 months of subscription-based client license agreements, showed only a moderate 8.8% year-over-year growth to $936.73 million. 

For the fourth quarter, analysts expect CLVT's EPS to decrease 3.49% year-over-year to $0.21. However, its revenue should advance 22.81% YoY to $559.51 million.

On February 17th, EPAM Systems reported earnings for the fourth fiscal quarter of 2021. The company’s total revenues for its fiscal fourth quarter grew 53.4% year-over-year to $1.11 billion, beating Wall Street estimates by $20 million. In Q4, the largest segment by revenues was the financial services segment with a 60% year-over-year growth to $255 million, while the highest growth rate demonstrated the travel & consumer segment, increasing 91% year-over-year to $233 million. Moreover, the company's acquisitions completed in the last twelve months added 8.7% to revenue growth in Q4.

Besides, EPAM Systems' fourth-quarter Non-GAAP EPS stood 52.5% higher year-over-year at $2.76, beating estimates by $0.25. The company also issued FY2022 guidance with expected revenue of at least $5.15 billion, representing a year-over-year growth rate of at least 37%.

For the next quarter, analysts project EPAM's EPS to be $2.56, indicating a 41.45% increase compared to the year-ago value. Moreover, a $1.11 billion average revenue projection for the first quarter of fiscal 2022 implies 41.91% year-over-year growth.

Comparative Valuation

In terms of Forward P/E, EPAM is currently trading at 51.26x, which is about 115% higher than CLVT, whose multiple is currently standing at 23.85x. When it comes to the FWD EV/Sales multiple, CLVT's EV/Sales multiple of 8.38x is 28% higher than EPAM's 6.55x. 

Although Clarivate has a better gross profit margin of 65.66% compared to EPAM's respective figure of 34.14%, EPAM Systems' net income margin of 12.59% and levered FCF margin of 11.97% compares favorably with Clarivate negative values. 

Conclusion 

While both EPAM and CLVT should benefit from the industry’s growth in the long term, I believe that EPAM is a better pick based on its superior financials and higher forward growth rates. In addition, the company's recent acquisition of Optiva is expected to accelerate its top-line growth. Although EPAM looks overvalued from a valuation standpoint, I believe these valuation multiples reflect its strong fundamentals, making this premium worth paying.

CLVT shares were trading at $16.16 per share on Thursday afternoon, down $0.51 (-3.06%). Year-to-date, CLVT has declined -31.29%, versus a -7.07% rise in the benchmark S&P 500 index during the same period.

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.

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