WNS (NYSE:WNS) and Globant (NYSE:GLOB) are two top picks from this award winning professional equity analyst.
Maggie Nolan, CPA, is an IT services analyst at William Blair.
She began at the firm in June 2015 and previously worked in public accounting.
She graduated from Miami University with a bachelor’s degree in business, with majors in finance and accounting.
In her wide ranging, exclusive 3,519 word interview with the Wall Street Transcript, Ms. Nolan demonstrates her ability to pick winners.
“IT services are the bucket of companies that will do anything from system integration work, tech consulting, product development, and beyond. I also include the BPO companies within my coverage — business process outsourcing — and some value-added resellers as well…
I cover some of the custom product development companies, so like an EPAM (NYSE:EPAM) or a Grid Dynamics (NASDAQ:GDYN) or a Globant (NYSE:GLOB), and in the BPO space, WNS (NYSE:WNS), Genpact (NYSE:G) for example, and value-added resellers, like CDW (NASDAQ:CDW) or ePlus (NASDAQ:PLUS).
All in, I have over 20 companies under coverage in this space, ranging from large cap all the way down to even some micro-cap companies.”
A recap of the last few years illustrates how WNS (NYSE:WNS) and Globant (NYSE:GLOB) will become dominant stocks in this category:
“It’s been a really interesting last couple of years for IT services in general.
You have the COVID-19 pandemic that hit in 2020, which really changed how people look at the industry.
You had a massive shift in work from home that accelerated a lot of business decisions around migration to the cloud, collaboration technology, looking at different ways to interact with their customers in a virtual world.
And so, the IT services space, when things stabilized a little bit from the initial fear of the pandemic, saw a huge boom in spending around digital transformation and all of the work that was fueled by those trends that I mentioned from the pandemic.
C-suites and boards everywhere were asking the question: How can I use technology to stabilize my business in this environment to help me overcome supply chain challenges, challenges with reaching the customer through a virtual format?
And so, you saw a tremendous amount of spend going towards these types of initiatives and the group really benefited.
And we saw growth rates really accelerate across the IT services group to levels that we have not seen in the recent past.
You saw hiring levels accelerate really rapidly for the people who do this work within the organizations to meet the tremendous demand that we saw.
And some really interesting dynamics around the employees at these companies, taking on different preferences of how they want to work and where they want to work, as we saw with a lot of companies during COVID.
And we saw a shift of these employees into new roles, high levels of attrition, and it drove wages up over time as well. You have a really strong demand environment for these companies.
You have a changing supply side as well. Pricing really increased and that was kind of the peak of COVID, all these factors coming together, coming out of the initial phases of COVID.
So the next phase was things starting to normalize a little bit.
You saw the spending patterns at clients starting to come down and a set of companies within IT services realizing that, well, we can’t hire at these rates forever, because, one, there’s not enough talent out there.
We’re already very supply constrained.
There’s a big gap in the number of employees to actually fit these job descriptions.
Then the other piece of it is that they didn’t want their culture to start to fray from bringing on so many employees in such a short amount of time.
Because when the culture starts to fray, the quality of the deliverables to your clients can decline.
So you saw these business models starting to slow.
Around the same time, geopolitical turmoil impacted the supply of talent and demand patterns from clients.
And then you saw the onset of some level of macroeconomic uncertainty which started to slow down some of the spending as well.
So we’ve come to a point where now we’re seeing slower levels of growth out of the majority of this group, although there are some that are more resilient than others.
BPO, in particular, tends to have a little bit more resilience when it comes to spending in difficult macro environments.”
The particular strengths that WNS (NYSE:WNS) and Globant (NYSE:GLOB) bring to this situation are detailed in full by Ms. Nolan.
“We’ve talked about several of our BPO companies since the economy has slowed somewhat.
And in particular, we’ve highlighted WNS (NYSE:WNS) as a company that we feel can be a good holding in a scenario where you think there’s going to be a prolonged downturn.
The company has a low correlation to the macro.
So they can grow revenue in the double digits and hold a pretty steady, if not slightly expanding, margin profile in these types of environments because they are able to lean on one of the dimensions of their offerings, which is that they can drive efficiencies in their clients’ business models and drive down costs and increase productivity.
So in that type of environment, we actually see some clients shorten their decision cycles during the sales process and push work more aggressively to a company like WNS (NYSE:WNS) to meet their own needs in terms of their own internal budgets.
So that’s one that we’ve found to be a good holding in this type of environment.
Now, the last couple of weeks have been pretty dynamic for that stock and the peer group around fears around conversational AI and chatbots and what does that do to their value proposition.
Well, WNS (NYSE:WNS) has probably right around or less than a fifth of revenue coming from some of those more customer service types of offerings.
And the reality is, artificial intelligence is not catching them off guard, chatbots are not catching them off guard.
They’ve been incorporating this type of technology into their service offering for a number of years, using chatbots as a first line of defense in customer experience interactions and then also using the technology to augment their own employees.”
“If we stick with our theme around companies that are embracing technology, there’s a company, Globant (NYSE:GLOB), they do a lot of custom product development for their companies, and they’re an interesting one because they’ve seen these trends in artificial intelligence take hold as well. And they’ve done a lot of work within their own business model to have their employees embrace this technology.
So you can look back and see that they’ve been talking about augmented coding, reusable code, no-code applications and empowering their employees with that for a number of years.
They’re one that we’ve always felt has been cutting edge within the IT services landscape in terms of emerging technologies. They’re quick to adopt things internally and then they are really proficient at using those technologies to help improve projects and experiences for their clients as well.
So, a really interesting company that we like.
Certainly, not bulletproof in terms of the macro and client budgets in this type of economy, but definitely long term have really nice positioning for secular tailwinds in digital transformation spend.
So it’s a good time to do work on the company, understand their business model and value proposition.
Again, it’s an IT services company serving mostly blue-chip customer base with employees out of Mexico and Argentina and elsewhere in Latin America as well as India, growing in a normalized environment, healthily in the double digits, and have an ability to drive a similar level of growth on the bottom line as well.”
Get the complete details on WNS (NYSE:WNS) and Globant (NYSE:GLOB), and many others in the IT Services sector, exclusively in the 3,519 word interview in the Wall Street Transcript.