Is Endava's Strategic Resilience and Diversification Setting the Stage for a 2026 Rebound?

In the volatile world of tech services, few companies exemplify the marriage of value investing principles and strategic foresight as Endava (NASDAQ: ENDA). With a trailing price-to-earnings (P/E) ratio of 30.90 and a forward P/E of 8.64, Endava appears to trade at a discount to its intrinsic value, especially when juxtaposed against its peers in the IT services sector. Its price-to-book (P/B) ratio of 0.87 further underscores a market valuation that lags behind its tangible assets, hinting at potential undervaluation. For value investors, this is a compelling starting point—but the true test lies in whether Endava's operational and strategic choices can weather macroeconomic turbulence and position it to capitalize on a 2026 rebound in tech demand.

Strategic Resilience: Cost Discipline and Capital Allocation

Endava's management has adopted a laser focus on cost discipline, a critical trait for cyclical businesses. The company's debt-to-equity ratio of 0.29 reflects a conservative capital structure, minimizing vulnerability to interest rate hikes. Complementing this is a $50 million share repurchase program, signaling confidence in its cash flow and long-term value. Such initiatives align with the principles of Benjamin Graham, who emphasized the importance of “margin of safety” and prudent capital allocation.

The CEO's mantra—“controlling what we can”—has translated into tangible results. For Q3 FY2025, Endava reported a 11.7% year-over-year revenue increase to £194.8 million, with adjusted free cash flow surging to £17.5 million. These figures highlight operational efficiency in a climate where many tech firms are retrenching. The company's ability to generate consistent cash flow, even amid macroeconomic headwinds, suggests a durable business model.

Geographic and Sector Diversification: A Hedge Against Volatility

Endava's geographic footprint has evolved into a strategic asset. North America now accounts for 37% of revenue, up from 30% in the prior year, while the UK remains a stable contributor at 35%. This shift toward North America—a region with robust IT spending—positions Endava to benefit from the U.S. and Canadian markets' resilience. Meanwhile, its global delivery model in India ensures cost-effective scalability, a critical advantage in a sector where margins are often razor-thin.

Sector diversification further insulates Endava from industry-specific downturns. Payments and Banking & Capital Markets (BCM) each contribute 19% of revenue, while TMT (Technology, Media, and Telecommunications) accounts for 18%. Notably, healthcare—a sector with long-term growth tailwinds—has surged to 12% of revenue, up from 4% in the prior year. This expansion into healthcare, fueled by the GalaxE acquisition, adds a high-margin vertical to Endava's portfolio and aligns with the broader trend of digital transformation in healthcare IT.

Alignment with the IT Services Recovery: AI and Core Modernization

The IT services sector is on the cusp of a rebound, driven by AI adoption and legacy system modernization. Endava's proprietary AI accelerators—tools like Chronos, Ray, and Morpheus—position it as a key enabler of this shift. These tools streamline legacy system analysis, optimize cloud environments, and reduce transformation costs, addressing pain points for clients seeking to integrate AI into production.

Moreover, Endava's Dava.X platform, which combines expertise in emerging and established technologies, is a strategic differentiator. As businesses move AI use cases from proof of concepts to scalable solutions, Endava's deep technical expertise and global delivery model will be critical. The company's 32.5% revenue growth in North America during Q1 2025, partially driven by GalaxE, underscores its ability to monetize these trends.

Macro Trends and the 2026 Outlook

The broader IT services sector is expected to grow by 9.3% in 2025, with AI and cloud infrastructure leading the charge. Endava's guidance for FY2025—revenue of £771.5 million to £773.5 million, representing 6.0% to 6.5% growth—suggests a conservative but achievable trajectory. However, the company's long-term positioning for AI-driven digital transformation and core modernization could unlock higher growth as demand accelerates in 2026.

Risks and Considerations

While Endava's strategies are compelling, risks remain. Its net profit margin of 2.33% is modest, and the IT services sector is highly competitive. Additionally, macroeconomic volatility—such as prolonged inflation or a global recession—could delay the 2026 rebound. However, Endava's low debt, diversified revenue streams, and focus on high-growth verticals like healthcare and AI mitigate these risks.

Investment Thesis

For value investors, Endava represents a unique opportunity: a cyclical tech services firm with a conservative balance sheet, disciplined capital allocation, and strategic alignment with the AI-driven recovery. Its current valuation, particularly the forward P/E of 8.64, suggests the market is not fully pricing in its long-term potential. As the IT services sector rebounds in 2026, Endava's geographic and sector diversification, coupled with its AI and modernization capabilities, could drive outsized returns.

Final Verdict: Endava is a compelling long-term buy for investors who can tolerate near-term volatility and are positioned to benefit from the 2026 IT services rebound. Its strategic resilience and undervalued stock make it a standout in a sector poised for transformation.