Concentrix: Significant Business Growth Driven By AI, And Cheap Valuation

seekingalpha11-02

Concentrix's diversified client base, strong cash flow, and expanding AI-driven services make it a compelling buy at the current stock price.The company’s global presence and technological innovations...

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You can become one too!","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4106":"数据处理与外包服务","CNXC":"Concentrix Corp","BK4226":"数据处理及外包服务"},"translate_title":"Concentrix：人工智能推动业务显着增长，估值低廉","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CNXC":0.9},"content_text":"Concentrix's diversified client base, strong cash flow, and expanding AI-driven services make it a compelling buy at the current stock price.The company’s global presence and technological innovations in data analytics and AI are expected to drive future revenue and profitability growth.Concentrix's efficient debt management and significant undervaluation compared to peers suggest substantial upside potential.Despite potential risks from technological failures and client concentration, the company looks like a buy.Editor's note: Seeking Alpha is proud to welcome Kingfisher Research as a new contributing analyst. You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more »    Martina_L/iStock via Getty Images  Investment Thesis With many large clients working with Concentrix (NASDAQ:CNXC), recent increases in the total assets, cash in hand, and cash flow, I am a buyer of shares. I think that the need for data analytics and artificial intelligence applied to customer experience applications make Concentrix a fantastic business model. If the company continues to expand its offerings into new jurisdictions, and new technological innovations related to artificial intelligence and machine learning arrive, in my view, cash flow growth could continue. Concentrix: Different Clients, Many Sectors Served, And Business Growth Concentrix helps clients shift from old Customer Relationship Management to new consistent brand experience tools. Large clients from the Fortune Global 500 group trust Concentrix because of the analytics and actionable insights received as well as customer experience enhancement. Management explained the most recent business model with the following words. Our differentiated portfolio of solutions supports Fortune Global 500 as well as high-growth companies across the globe in their efforts to deliver an optimized, consistent brand experience across all channels of communication, such as voice, chat, email, social media, asynchronous messaging, and custom applications. We strive to deliver exceptional services globally supported by our deep industry knowledge, technology and security practices, talented people, and digital and analytics expertise. Source: 10-k I think we can expect low revenue growth volatility because the company operates in many industries involving different types of clients. In my view, if some industries do not perform due to an economic recession, other clients may do. The company provided the following information about the number of sectors served. Yes, Concentrix appears to work for almost everybody. We primarily support clients in verticals with certain characteristics, such as high growth, high transaction volume, high levels of compliance and security, and steep barriers to entry. Our strategic verticals include technology and consumer electronics, retail, travel and ecommerce, banking, financial services and insurance, healthcare, communications and media, and other. Source: 10-k With many clients and a business model that appears well diversified, the financials of Concentrix seem to confirm business growth. In the last six years, the cash flow statement indicated positive net income and net income growth. Besides, it is beneficial that the company's cash flow from operations grew significantly, driven by net income growth and beneficial changes in working capital. In my view, clients seem to be paying at a faster rate, which brings more liquidity to the company's financial statements. In my view, the assessment of the balance sheet also appears beneficial. Concentrix reports a significant increase in cash in hand, and total assets are increasing thanks to net property plant and equipment increases, goodwill growth, and increase in total receivables. Clearly, Concentrix acquired other competitors in the last six years, which is accelerating business growth. I would be expecting new acquisitions in the future because the company seems to know how to buy other peers. The list of liabilities shows an increase in the total amount of long-term debt, which Concentrix appears to use to buy other competitors. In addition, I identified a significant increase in accrued expenses, which means that Concentrix does not need to pay certain business providers in advance. In my view, the company is growing. Hence, many providers trust the company's future operations, and are offering financing. It is quite ideal. With the company's performance presented, I reviewed some of the future revenue catalysts, which could accelerate profitability in the future. I suspect that other investors may find more reasons to buy the stock. Therefore, I am buying at the current share price. Growing Trends In Data Analytics And Artificial Intelligence In my view, data analytics and digital solutions are these days redefining the way customers and business models interact. Modern enterprises need to change their customer experience processes in order to enhance their communication practice. Concentrix seems to be doing exactly that. Hence, I would expect net income growth and cash flow growth to creep up. It is also worth reminding that the company's solutions seem to offer more services at lower cost than previous traditional CRMs. In this regard, the company provided the following commentary in the last annual report. The market is evolving from customer relationship management solutions that act as a cost cutting measure toward end-to-end CX management solutions that create value throughout the entire customer lifecycle at an appropriate cost. Source:10-k Technological improvements related to Generative AI and machine learning capabilities are also expected to enhance connections with clients. According to many commentaries delivered in the annual report and recent quarterly report, Concentrix notes that technological innovation is expected to open new doors and opportunities for the business model. As a result, in my view, we could see further acceleration of future net sales growth in the future. Global Presence Could Also Multiply Revenue Sources Concentrix operates in more than 70 countries, and the company's platforms are available in around 150 languages. With know-how generated in the United States, I do not see why the company would not successfully continue its geographic expansion. In my view, new countries offer access to a larger target market, which multiplies potential revenue growth. Concentrix made the following remarks in the last annual report. Our global footprint includes a strong presence in emerging markets such as India, Brazil, Turkey, Egypt, China, South Africa, Vietnam, Indonesia and Thailand, which provides an opportunity to grow with our clients in these regions. Our ability to create value for our clients across a global delivery platform has enabled us to be a partner of choice. Source: 10-k Concentrix Seems to Know How to Negotiate with Debt Investors I reviewed the list of debt agreements because I think the agreements offer significant information about the risks perceived by debt investors. Many of the company's notes report interest rate close to 6% and 7%. Besides, debt agreements are many times linked to the SOFR rate, with margins of close to 1.12% and 2%. Given the current market conditions in the debt market and the current interest rates, I do not think that Concentrix is paying a lot for its debt agreements. It appears clear that the company is good at negotiating with debt investors. In my view, debt investors, which are usually clever individuals, do not think that the company's business model involves a significant number of risks. The following is information about some of the most recent debt agreements signed by Concentrix. On August 2, 2023, the Company issued and sold (i) $800,000 aggregate principal amount of 6.650% Senior Notes due 2026 (the “2026 Notes”), (ii) $800,000 aggregate principal amount of 6.600% Senior Notes due 2028 (the “2028 Notes”) and (iii) $550,000 aggregate principal amount of 6.850% Senior Notes due 2033 (the “2033 Notes” and, together with the 2026 Notes and 2028 Notes, the “Senior Notes”). Source: 10-Q Borrowings under the Restated Credit Facility bear interest, in the case of SOFR rate loans, at a per annum rate equal to the applicable SOFR rate (but not less than 0.0%), plus an applicable margin, which ranges from 1.125% to 2.000%, based on the credit ratings of the Company’s senior unsecured non-credit enhanced long-term indebtedness for borrowed money plus a credit spread adjustment to the SOFR rate of 0.10%. Source: 10-Q Financial Health, Balance Sheet, And Expectations The company reports an asset/liability ratio larger than 1x, and a large amount of cash. I am not really concerned about the financial health. It is worth noting that CNXC reports a large amount of goodwill, and intangible assets. Goodwill impairments could push the stock price down. Source: Quarterly Report The total amount of debt stands at close to $4.9 billion. In the last six years, the total amount of debt increased significantly. With that, the total assets also increased substantially. Besides, given the company's ability to produce free cash flow, and net income, I am not afraid about the total amount of debt. Source: Quarterly Report In the last quarter, the company reported lower than expected earnings per share; however, revenue growth was better than prevised. I did not appreciate the results. In the three months ended August 31, 2024, revenue was close to $2.3 billion, and net income stood at close to $16 million. With that being said, it is worth noting that the company reported positive net income for many years. Source: Quarterly Report Considering the numbers delivered in the past, in my view, the numbers to be delivered in 2025, and 2026 will most likely be beneficial. With large clients from the Fortune Global 500, and the growing markets in which the company operates, net income will most likely grow. My expectations are a bit better than that reported by other analysts, who expect 2025, and 2026 EPS growth close to 10%. I also took a look at the 2024 revenue growth expectations, which stand at close to 35%. In my opinion, CNXC may deliver better than expected EPS growth because of the recent acquisition of Webhelp. Concentrix reported the acquisition of Webhelp for close to $3.7 billion. We are talking about a large target market expansion that could accelerate net income, and revenue growth in 2025, and 2026.  The combination of these two companies allows us to take even more access to the $550 billion expanded marketplace we compete in. Source: Reuters  Webhelp was a leading provider of CX solutions, including sales, marketing, and payment services, with significant operations and client relationships in Europe, Latin America, and Africa. Source: 10-Q  Source: 10-Q My Revenue Growth Expectations Given previous net sales growth, and the growth expectations for the CRM market, my net revenue expectations include revenue growth close to 9%, and 7% from 2025 to 2028. From 2018 to 2023, revenue growth was close to 12% and 23%. Hence, total revenue would be close to $11 billion in 2028, and $10.4 billion in 2027. Source: Author's Compilations Net Income Expectations, Valuation, And Sensitivity Analysis From 2021 to 2023, I saw a significant decrease in net income growth, so I forecast small net income growth in 2025, 2026, 2027, and 2028. With net income growth between 17% and 4% from 2025 to 2028, 2028 net income would be around $699 million. My free cash flow expectations are also pretty much connected to the free cash flow reported in 2021, 2022, and 2023. My FCF growth expectations stand at close to 22%, and 11% from 2024 to 2028. Let's note that FCF growth was close to 32% in 2020. I am not really thinking out of the box here. My DCF model includes numbers reported in 2024 such as the total share count of close to 65 million, and net debt of $5.5 billion. Source: SA Putting everything together with a WACC between 4%, and 5.8%, and terminal multiple between 5.5x and 10.5x FCF, I obtained a target valuation between $57 and $144 per share. Source: Author's Compilations Undervalued Compared To Competitors There are many reasons to believe that the company could be trading at higher marks. The company's EV/EBITDA, Price/cash flow, and the PE ratio are significantly lower than the valuation given by other peers. Source: Seeking AlphaSource: Seeking AlphaSource: Seeking Alpha   Challenges Even considering the company's technological innovations, in my view, future IoT or AI tools may become competitor of Concentrix. Self-service options, automatic algorithms, and other emerging technologies could lower the need for human intervention. Under this case scenario, I think that Concentrix could suffer significantly as the total market size available for the company could shrink. As a consequence, in my view, the company could experience a decline in net sales growth. In the last annual report, the company noted that 22% of the total 2023 revenue came from five clients, which may be a problem for certain investors. These clients may decide to pay a bit later to Concentrix, or they may demand better services for the same price. Under the worst-case scenario, I think that some of these clients could even leave Concentrix, which may bring a significant decline in revenue growth. The stock price could fall. The company's technologies are quite complex and include significantly high grades of sophistication. The company connects data from many channels, telephone, internet, data services, and other third parties. In my view, failed technological events, failed optimization, automatization, or control could bring a number of problems to ongoing operations. Lower performance may not be the worst that can happen to the company. The company could suffer from damages in the brand reputation, which may push the price down. The company offered the following explanation in this regard. We operate an extensive internal voice and data network that links our global sites together in a multi-hub model that enables the rerouting of voice and data across the network, and we rely on multiple public communication channels and telephone, internet, and data services provided by various third parties for connectivity to our clients. Maintenance of, and investment in, this technology is critical to keeping our team productive and the success of our service delivery model. Any failure in technology, or in our ability to manage or optimize our resources, may impair service quality and have a negative impact on our operations. Source: 10-k In line with the previous commentary, Concentrix reported that failed technological events could also damage the company's relationships with telephone and data service providers. Future net income growth could be significantly damaged by such event. Telephone, internet, and data service providers may elect not to renew their contracts with us or increase the cost of such services. If our communications or information technology systems are disrupted or the cost of maintaining those systems increases significantly, our results of operations could be adversely affected. Source: 10-k In Closing Large business conglomerates trust Concentrix, and the company operates in many sectors and different jurisdictions. In my opinion, future need for data analytics, changes in the way customers and businesses interact, and the availability of large amount of data may accelerate the company's business model.  Previous growth observed in the cash flow statement, the balance sheet, earnings momentum, and beneficial expectations could bring the attention of new investors, which may represent gasoline for the stock price. Comparable multiples and the valuation of peers indicate that the company could be worth at least 30% more if we are conservative. Besides, my DCF model showed a valuation close to $57 and $144 per share. I think that changes in the FCF growth assumptions may lead to different outcomes. 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