Endava Earnings: Cutting Fair Value 20% on Weak Outlook and GalaxE Acquisition; Shares Undervalued

Narrow-moat Endava shares declined 42% on a weak outlook, and it announced the acquisition of GalaxE Solutions, the largest in Endava's history ($405 million or 10% of the market cap). We’ve cut our fair value by 20% to $62, primarily due to reducing our revenue growth forecast. We’ve delayed our expected cyclical recovery to fiscal 2025 (June year-end) from fiscal 2024. Excluding the GalaxE acquisition, we now expect five-year revenue growth CAGR of 8.9% versus 13.8% previously. We see the GalaxE acquisition as broadly neutral to our valuation. Overall, we think the market has overreacted, with shares trading at a 40% discount to our fair value estimate. However, with serious doubts over the path of revenue recovery now, several quarters of positive results will be needed to regain investor confidence.