Korn Ferry: Undervalued Gem with Digital Growth Catalysts Ahead

Investors often overlook Korn Ferry (KFY) as a valuation bargain in the human resources sector, despite its compelling fundamentals and strategic pivot toward high-margin digital services. With a P/E ratio of 13.91—nearly 50% below the 29.04 sector average—KFY is priced as if it's a laggard, not a company primed for margin expansion and earnings growth. Here's why now could be the time to buy.

The Undervaluation Case: P/E at a 50% Discount

KFY's trailing P/E of 13.91 is far below the 29.04 sector average, even as its recent earnings beat and digital initiatives signal a turnaround. This gap suggests the market has yet to price in the company's potential. Compare this to peers like Heidrick & Struggles (HSII), which trades at a P/E of 12.45—though KFY's higher valuation reflects its stronger growth profile.

The sector's P/E has compressed in 2025, but KFY's discount persists. Analysts at Goldman Sachs recently raised their price target to $85, implying 28% upside from current levels, citing KFY's underappreciated margin leverage.

Earnings Beat and a Strategic Pivot to Digital

Korn Ferry's Q1 results beat expectations, with revenue rising 7% year-over-year, driven by demand for its Talent Suite, a cloud-based HR analytics platform. The company's shift toward recurring digital revenue streams—now 35% of total revenue—is critical. These high-margin services (with gross margins exceeding 70%) are key to pushing EBITDA margins beyond 16-18%, up from 14% in 2024.

The upcoming Talent Suite 4.0, launching later this year, promises to deepen client retention and upsell opportunities. Its AI-driven analytics and predictive talent management features could lock in more enterprise clients, accelerating digital revenue growth.

Backtest the performance of Korn Ferry (KFY) when 'quarterly earnings exceed estimates' and 'hold for 30 trading days', from 2020 to 2025.

Historically, KFY has shown an average 12.79% gain following quarters where earnings beat estimates, with returns compounding at a 2.31% annual rate from 2020 to 2025. While this reflects strong momentum, the strategy carries high volatility, with a maximum drawdown of -23.52% and a Sharpe ratio of 0.14—indicating risk-averse investors may prefer alternatives. These results underscore that KFY's earnings beats have historically rewarded patient investors, though the path to gains has been uneven.

Addressing ROE Concerns: Retained Earnings and Margin Leverage

Critics point to Korn's ROE of 14%, below the sector's 21% average. But this metric is misleading. KFY retains 82% of its earnings (vs. 60% for peers), plowing cash into its digital platform and client success teams. Unlike competitors focused on low-margin staffing, KFY's strategic focus on high-value services like executive search and analytics is paying off.

As digital revenue scales, operating leverage will improve. The company's Q1 gross margin expanded 200 basis points year-over-year, a sign this transition is already underway.

Why Buy Now?

• Undervalued: P/E of 13.91 vs. sector average of 29.04.
• Margin Upside: Talent Suite 4.0 could push EBITDA to 18%+.
• Analyst Support: Goldman's $85 target implies 28% upside.
• ROE Improvement: Retained earnings and digital growth will lift returns.

Conclusion: Buy Korn Ferry for Valuation and Catalysts

KFY is a valuation outlier in a sector where growth stocks command premium multiples. Its digital pivot is not just a side project—it's a margin-accelerating engine that could reshape the company's profitability. With the Talent Suite 4.0 launch and Goldman's raised target, now is the time to position ahead of a potential re-rating.

Recommendation: Buy Korn Ferry (KFY). Set a target of $85 and a stop at $60.

Note: This analysis assumes no material changes to Korn Ferry's business strategy or macroeconomic conditions. Always conduct your own research before making investment decisions.