This tech stock ditched London for Wall Street. Now…

However, London is home to a tech company that Morningstar analysts are following. Narrow-Moat Endava (DAVA) provides cloud computing transformation services, software engineering, technology consulting and test automation services and counts MasterCard (MA) and Arm Holdings (ARM) among its clients.

Endava has something in common with the latter company: both abandoned the idea of ​​listing in London for a New York float.

Arm shares soared when the company floated on the Nasdaq last year, robbing the City of London of a £40.86bn trading event. Endava listed on the New York Stock Exchange in 2018. But while Arm is overvalued, according to Morningstar analysts, Endava is significantly undervalued. The company’s shares are currently trading at $31.94 (£24.17), a discount of almost 49% to Morningstar’s estimated fair value of $62.

Although the company is focused on expanding revenue in North America, the UK dominates revenue generation at 40%, with continental Europe following at 20%. The IT company is now working to expand its sector base from the financial services, technology, media and telecommunications industries to include retail and healthcare customers.

Morningstar Key Values ​​for Endava (DAVA)

• Morningstar Estimated Fair Value: $62.00
• Morningstar rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High
• Discount to fair value: 49%
• Sector: Technology

Morningstar senior equity analyst Rob Hales says Endava is still heavily exposed to financial services.

“Within financial services, Endava is known for its expertise in payments and private equity,” he wrote in a recent note.

“Like many of its peers, Endava’s core strategy is to land and scale, which means securing large clients and growing revenue in those relationships by offering them more and more services.

“Endava’s 10 largest customers account for around a third of the group’s revenue, with the largest, MasterCard, contributing around 10%. MasterCard has been a customer for over 20 years.

“The (or) delivery model is based on agile project management from employees at nearby locations, which they plan to expand. To best serve the unique digital transformation goals of its clients, the flexibility of the iterative nature of agile project management is effective.”

Endava stock is short and unloved. Why?

Despite being a UK-based technology firm, the company is unpopular with top London fund managers. Indeed, Morningstar data shows that only two UK-domiciled Morningstar-Rated funds own the company. Exposure varies.

The bronze-rated T. Rowe Price Future of Finance Equity fund and the neutral-rated Aegon Sustainable Diversified Growth fund hold the business at 2.28% and 0.11% of their portfolios, respectively.

According to Michael Field, European equity market strategist at Morningstar, investors may be hesitant to take on the liquidity risk of owning Endava because of its small-cap status: It’s worth just $1.3 billion.

“Morningstar sees a lot of value in the company – it’s a five-star name,” says Field.

“If you work a long time on the business, you can make a lot of money from it if it works. But if you keep it and it goes wrong, investors could risk their reputation. Whereas with a company like Arm Holdings, if it goes wrong, basically half the market owns it.”

For example, Endava’s share price fell on February 29, 2024, when it published its final quarter results for 2023. In a market announcement, it said it was £70m behind its revenue targets. Shares later fell 57.81% to $37.07 from $63.65.

Its share price has not recovered.

Field says this is an example of how growing companies are extremely sensitive to broader changes in the economy.

“You have a situation where contracts can be nebulous for the business, if they don’t arrive on time, it can be detrimental to short-term revenue,” he says.

“If you also look at their exposure, the UK and Europe have not been high growth areas and companies are pulling back on capital spending because of the unknowns in the economy.”

Endava now expects its fiscal 2024 revenue to be between $978.5 million and $981.13 million.

“As we noted last quarter, amid serious doubts about the path to revenue recovery following their lowered outlook for the year, Endava needs several quarters of positive results to regain investor confidence,” Hales writes.

Why is there a listing drought in London?

Endava went public on the New York Stock Exchange on July 31, 2018. The business is one of a number of names that have ditched London for a US market seen as more receptive to growing tech names.

Betting firm Flutter also ditched its primary listing in London in favor of New York this year, while cybersecurity giant Darktrace, which floated at London 2021, also accepted a private equity offer from the US, removing it from the LSE registers.

“There is an advantage to listing in the US because companies have access to a wider capital market,” says Field.

“Companies typically get higher valuations when they list in the US. This trend was promoted by Arm. But the downside to being invested in the US if you’re a UK tech company is that you’re a relative unknown.

“Liquidity will be the number one issue. It’s not that big and it’s a US listed company. These are the obstacles they face immediately.”

Dava Bulls Say

Endava specializes in digital transformation services, which is one of the fastest growing areas in the IT services market

The company’s landing and expansion strategy is paying off, as evidenced by the increase in average spend of its top 10 customers.

Endava’s payments expertise should be transferable to customers in industries that require similar services, such as retail, automotive and healthcare providers.

Dava Bears Say

High growth expectations for digital transformation services are attracting new competition from players big and small

Endava has limited ability to grow margins given the low operating leverage of its business model

Endava’s revenue base is concentrated in the UK and Mainland Europe and in the financial services (particularly payments and private equity) and TMT industries