GBYN - Grid Dynamics

[Broeb22]

I took a small position in this one recently.

 

A small IT outsourcer similar to EPAM and DAVA with similar organic growth metrics of 30%+ in recent years in a market growing 20%+.

 

They are priced at about 20x earnings which no one will say is cheap in today's market, but when you consider how small they are and the likelihood (perhaps possibility) that they provide 25%+ returns from a fair valuation for a number of years, it's attractive to me.

 

They have $75 million of cash and no debt, and in this environment where high fixed costs can kill you, their main asset is their workforce which can scale up or down based on volume of work.

 

The main risk I see is customer concentration, and their stated focus on retail and technology. If retail is shutting down, they may not be investing in high-level computer programming. At the same time, I could argue when eCommerce is the only game in town that computer programming is the ONLY thing you should be investing in.

 

Anyways, it's spiked today, but I think it's worth a look.

[Broeb22]

Responding to Jurgis’ request in the what are you buying thread.Note that actual ticker is GDYN not GBYN.

 

I believe Grid Dynamics is an attractive long term investment because it is a small company ($100 million revenue) in a large market growing at mid-teens. I have invested in this space multiple times over the years and have been rewarded handsomely so to some extent I’m just playing the same hand that’s worked before. I define this space as Central/Eastern Europe IT outsourcers which are more focused on customer-focused areas of the business, whereas Indian outsourcers have more of a reputation for doing a full range of IT services, from low-skill to high-skill. These businesses have run in to trouble recently as cheap labor arbitrage has given way to full automation of certain tasks. In my opinion the CEE outsourcers (EPAM, DAVA, LXFT) are driving this change.

 

To answer Jurgis’ question, revenue has been down or flat the last couple of quarters due to COVID and the fact that this company had 80% of its revenue in its top 10 customers and 50% of revenue derived from retail customers. Obviously COVID significantly restricted most retailers from spending on anything, even transformational work like GDYN is doing.

 

What gives me comfort is over the last couple of quarters GDYN has shifted from 50% exposes to retail  to 23% exposed to retail (in part due to significant declines during COVID for retail). What is most interesting about this is that their TMT, CPG, and Other segments are combined growing well over 50% and represent over 60% of the go-forward business and will continue to increase as a % of revenues.

 

 

I believe that like EPAM and DAVA, GDYN is a fast-growing business but went public before it had addressed significant customer concentration so it’s results have been volatile out of the gate. The other significant benefit is they have $126 million in cash right now so they have significant dry powder to acquire competitors. For now, it just means market cap > EV. The only other thing I would point out is the market cap is tough to figure because it came public via SPAC, so there are warrants and other dilutive instruments that I like to count for purposes of calculating EV/mkt cap.

 

You almost have to look at EPAM and DAVA and compare/contrast them with GDYN and see if they are generally similar or generally different. I feel like they are generally similar but you may feel differently.

[Jurgis]

Thanks for writing and posting.

 

I took a look at the company and it's not a business I am interested in investing into, so sorry, but I'm gonna bail after asking you to write.  ::)

Hopefully this is going to be useful for others though.  8)