A Stock On The Verge of Becoming a $1 Billion Company

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Buyers will have found it hard to look at the market after a series of strong sell offs, but this shouldn't stop investors shopping around for the next opportunities.  It has been a mixed bag for IPOs over 2012. A bright start to the year was overshadowed by the Facebook debacle, but this doesn't mean all IPOs have proven to be so troublesome.

EPAM Systems (NYSE: EPAM) had its IPO in February at $12 a share and quickly traded as high as $23.50 before profit takers took some money off the table.  Unlike Facebook, the stock has yet to drop below its launch price, and in recent months, has been preparing for another challenge on its highs.  What has investors so bullish?

Small Float

Illiquid stocks can be a blessing and a curse.  When stocks are flying, low liquidity stocks can lead to rapid price rises (of course the flip side is if they fall, illiquid stocks are hard to sell without experiencing significant slippage). However, illiquid stocks with strong fundamentals often keep rising, and it becomes necessary to implement stock splits to improve the liquidity.  EPAM Systems is making the right moves in this regard; the stock only has a float of 14.8 million shares.  Recent buying volume was seven times typical trading volume when it moved away from $18.50.

Strong Earnings

While it hasn't got the deep earnings history of some companies, it has managed to report a series of strong quarters, which have beat estimates every time.  The software provider operates delivery centers in central Europe, with client management locations in North America, Western Europe, and Russia.  The company recently launched Sephora's e-commerce site.  Net income for the three months ending in September was just over a third of annual net income, and slightly ahead of the comparable quarter last year.  Analyst projections for Q4 are for more of the same, but don't be surprised if it adds another penny as it did last year, for an EPS of $0.38 on $115 million in revenue.  

There are a couple of reasons for such optimism.  Its European operations have seen near 50% growth for the first nine months; adding $36 million in revenue for 2012 compared to 2011. Europe contributed a quarter of its total revenue, and was second to North America.  In addition, repeat clients saw an additional $30 million booked revenues from 2011.  Together this amounts to 21% of total revenue for the first nine months of 2012. This on the back of a minimal 1% increase in operation expenses for the same period.  

What about Competitors?

Cognizant (NASDAQ: CTSH) and Infosys (NYSE: INFY) are Large Cap rivals to smaller EPAM Systems.   Both companies have close to 150,000 employees compared to EPAM's 8,125, and report annual revenues above $6.4 billion compared to EPAMs sub-$0.4 billion.

However, both companies are enjoying continued revenue growth, which suggests there is plenty of room for expansion, particularly for a smaller company like EPAM Systems.  Cognizant Technology Solutions reported an 18% increase in revenue year-on-year for the quarter, and a 5% sequential growth; figures more likely for a Small Cap.  Infosys reported a more low key 3% sequential revenue growth for the quarter, but added 39 new clients with growth coming across the board - from major clients, down.  Infosys has guided for 3.7% sequential revenue growth for the next two quarters.

Cognizant Technology Solutions Corporation effectively confirmed EPAM System's growth story, by reporting its quarterly outperformance was "primarily driven by a stronger-than-expected quarter in banking and Financial Services and Continental Europe."  When the financial service figures were looked at independently; there was a 7% sequential growth for the quarter and 20% growth year-on-year.  Cognizant is viewing tight economic conditions in Europe as a driver for European companies to become more efficient, and therefore invest in innovation - an area where Cognizant can deliver.  This is good news for EPAM Systems too.  Infosys hadn't seen a material change in its European operations, although it reported the environment as "challenging".  Ironically, Infosys refers to its smaller footprint in Europe as a guide to potential expansion in the region, whereas Cognizant Technology Solutions' and EPAM System's existing strategy in Europe has already delivered growth for both companies.


EPAM Systems qualifies as an "emerging growth company" under Obama's Jumpstart Our Business Startups Act of 2012. The boards has yet to decide which of the accommodations of the Act it is entitled to follow, but it is the facility to follow them for up to 5 years after its IPO.  This may make it more difficult to do comprehensive due diligence, should it adopt some of the reporting exemptions.

Infosys noted it has increased wages for its offshore employees in India.  The increase wouldn't impact on guidance, but it does set the tone for wage inflation for companies with operations inside India.



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