EPAM Systems Downgraded by Multiple Analysts amid Weak Demand and Financial Outlook Cut

Analysts re-rated EPAM Systems, Inc EPAM after it slashed its second quarter and FY23 financial outlook due to weakness in the near-term demand environment. The stock traded upwards, with session volume breaching the 1 million mark vs. the average 100-day volume of 583.300K.

Citigroup analyst Ashwin Shirvaikar downgraded EPAM from Buy to Neutral and lowered the price target from $310 to $220.

The analyst’s expectations were below EPAM’s prior outlook but he also appreciated their decade-long track record and his view on optionality from the strong balance sheet to diversify and mitigate idiosyncratic risks. 

Still, both the magnitude and timing of the update surprised the analyst. The lowered outlook incorporates a change in approach to outlook, but now a “credibility re-build” adds to EPAM’s book of worries.

Stifel analyst David Grossman maintains EPAM with a Buy and lowers the price target from $320 to $240.

Barclays analyst Ramsey El-Assal downgrades EPAM from Overweight to Equal-Weight and lowers the price target from $310 to $220.

Piper Sandler analyst Arvind Ramnani downgrades EPAM from Overweight to Neutral and lowers the price target from $289 to $215.

Keybanc analyst Thomas Blakey downgrades EPAM from Overweight to Sector Weight.

Pipeline conversions are lower than previously assumed, in addition to some reduction in its pipeline. EPAM also cited continued high customer retention and an increasing pace of new logo acquisition on the positive side. 

The company noticed late last week that conversion rates and pipeline build would make it challenging to meet the low end of its prior guidance, leading to the relatively early 2Q23 negative preannouncement. 

Management further implied growth may not return until C2H24, and Blakey modeled declines Y/Y through 1Q24 with C2H24 up ~4% y/ y vs. his prior +14% CY24 forecast (~15% C2H24 prior) and full-year CY24 now +1%. 

EPAM remains well positioned to benefit from digital transformation, and he maintained that pent-up demand remains but notes limited, if not decreasing, visibility regarding the timing and magnitude for the top line to return to growth. 

In addition, EPAM’s relatively higher exposure to large, cloud-based, transformative deals vs. peers that are now apparently taking longer to close than previously thought, which appears to be affecting near-term conversion and pricing, particularly for existing customers.

Price Action: EPAM shares are trading higher by 2.49% to $208.31 on the last check Tuesday.

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