Is EPAM Systems stock a buy after plunging 32% year to date?

EPAM Systems Inc. (NYSE: EPAM), a global leader in digital engineering and consulting services, has had a tough year, with its stock plummeting 32% year-to-date.

This significant decline has drawn the attention of analysts, including Deutsche Bank, which initiated coverage of the company on August 22, 2024, with a Hold rating and a price target of $204, reflecting a modest potential upside of only 2% from its current trading price of $200.10.

This cautious outlook is driven by a mix of growth opportunities and significant operational headwinds that have emerged in the wake of the geopolitical unrest in Eastern Europe and a shifting delivery strategy that has impacted the company’s cost structure and service offerings.

Deutsche Bank’s note highlights that EPAM Systems had initially anticipated a strong growth rebound in FY24, particularly as the company expanded its delivery footprint beyond its traditional base in Ukraine, Belarus, and Russia.

However, the transition towards lower-cost regions like India has introduced new challenges.

The analysts expressed concerns about the weaker demand environment in the IT services sector and the potential negative impact of these shifts on EPAM’s margins.

While Deutsche Bank’s outlook for 2025 and 2026 suggests a recovery, the uncertainty surrounding the timeline and impact of these changes led to a Hold rating, indicating that investors should remain cautious.

What does Jefferies say about EPAM?

In contrast to Deutsche Bank’s cautious outlook, Jefferies upgraded EPAM Systems to a Buy rating in July, citing the company’s strong positioning in artificial intelligence (AI) as a key growth driver.

Jefferies raised its price target to $237, driven by the belief that EPAM is well-positioned to capitalize on the adoption of generative AI technologies, which could significantly boost the company’s organic growth over the next few years.

However, the benefits of AI integration are not expected to materialize in the near term, with Jefferies projecting meaningful revenue contributions from AI only starting in the second half of 2025 or later.

EPAM Q2 earnings report

EPAM Systems’ recent Q2 earnings report provides further insights into the company’s current challenges and prospects. The company reported a revenue decline of 2% year-over-year, totaling $1.15 billion, slightly beating analyst expectations.

However, the outlook for the full year remains cautious, with the company narrowing its expected revenue range to $4.59 billion to $4.625 billion, reflecting a modest decline from the previous year.

The Q2 results also revealed a drop in both GAAP and non-GAAP income from operations, indicating margin pressures that align with Deutsche Bank’s concerns about operational challenges.

From a cash flow perspective, EPAM Systems remains a financially solid company, despite the current headwinds. The company has maintained a strong cash position, with $1.79 billion in cash and equivalents as of June 30, 2024.

However, this represents a 12.3% decrease from the end of 2023, largely due to capital expenditures and share repurchases.

The company’s recent decision to initiate a new $500 million share repurchase program underscores its confidence in the long-term value of its stock, even as it navigates near-term challenges.

What headwinds does EPAM face?

EPAM Systems faces both headwinds and tailwinds as it looks to navigate the current market environment.

On the positive side, the company’s strategic acquisition of Odysseus Data Services in June 2024 is expected to enhance its capabilities in the life sciences sector, which has already shown strong revenue growth.

This move aligns with the broader trend of integrating AI and data analytics into healthcare, positioning EPAM for future growth.

However, the company is also grappling with broader macroeconomic challenges, including a sluggish demand environment in its core markets and the potential for further disruptions from its ongoing shift in delivery strategy.

In terms of valuation, EPAM Systems appears to be fairly priced at a forward price-to-earnings multiple of 19.5x. The stock is trading close to Deutsche Bank’s target of $204 and Jefferies’ more optimistic target of $237.

However, the uncertain revenue outlook and margin pressures suggest limited upside in the near term.

The company’s ability to generate strong cash flows and maintain a healthy balance sheet provides some cushion, but the market is likely to remain cautious until there is clearer evidence of a sustained recovery in demand and successful execution of its strategic initiatives.

With these fundamental factors in mind, it’s essential to explore how the stock’s price action reflects the current market sentiment.

Let’s turn our attention to technical analysis to see if the charts offer any clues about where EPAM Systems might be headed next.

EPAM technical analysis: Key levels for bulls and bears

EPAM’s stock has experienced a prolonged downtrend since late 2021, when it reached an all-time high above $700. This year, in June, the stock found support near its 2022 lows around $170—a hopeful sign for bulls, though it doesn’t change the overall downward trend.

Source: TradingView
At present, the stock is navigating a descending triangle pattern, which is typically seen as a bearish signal. If the stock breaks below the critical support level near $170, it could trigger a sharper decline, potentially leading to significantly lower price levels.

For investors who are optimistic about EPAM’s long-term prospects and considering a buy at current prices, it’s crucial to maintain a tight stop loss around $168 to mitigate potential losses if the downtrend continues.

On the other hand, traders who remain bearish on the stock might look to initiate new short positions if the price rises above $200, setting a stop loss just above the recent swing highs at $223. Should the bearish trend persist, the stock is likely to retest the $170 support level, providing an opportunity to book profits.