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Endava's AI-Driven Growth and Q3 FY2025 Catalysts: A Play on Tech Modernization Amid Volatility

Samuel ReedWednesday, May 14, 2025 8:16 am ET

65min read

In a world where macroeconomic headwinds threaten growth, Endava (NYSE: DAVA) stands out as a rare tech services firm delivering 20.5% CAGR revenue growth since 2020 while maintaining a 20%+ adjusted profit margin moat. With its May 14 Q3 FY2025 earnings around the corner, investors have a pivotal opportunity to bet on a company positioned at the intersection of AI-driven modernization and geographic diversification. Let’s dissect why Endava’s strategic bets could re-rate its valuation—and why waiting until after earnings risks missing the boat.

Revenue Resilience: Outperforming Headwinds with Margin Discipline

Endava’s 20.5% FY20-24 CAGR (compared to industry averages of ~10-12%) is a testament to its ability to navigate macro turbulence. Even in FY2024, when rising operational costs and currency headwinds pressured margins to 11.2% in Q2, management stabilized profitability in Q3, returning to a 12.6% adjusted profit margin. This resilience is no accident:

The company’s focus on high-margin AI and cloud modernization projects—which command 30–40%+ margins versus legacy IT services—has insulated its earnings. Clients in sectors like Banking & Capital Markets (BCM) and Healthcare are prioritizing generative AI integration, creating recurring revenue streams. For instance, BCM revenue surged to 21% of total revenue in Q3, up from 14% in 2024, as banks adopt AI-driven risk management and customer platforms.

AI/Cloud Dominance: The “Endavans” Advantage

Endava’s true moat lies in its 2,500+ AI-certified engineers (“Endavans”) and its proprietary tools like Morpheus (generative AI for code) and Compass (AI-driven IT orchestration). These assets enable Endava to lock in clients for years through $100M+ multi-year contracts, such as its recent deal with a global mobility company to build an AI-powered logistics platform.

The Agentic AI Industry Accelerator, launched in 2024, further cements its leadership in regulated sectors. By tailoring AI solutions to compliance-heavy industries like finance and healthcare, Endava avoids commoditization. For example, its work with a top-five global insurer to automate claims processing via AI has reduced cycle times by 40%.

Geographic Shift: From EU Reliance to APAC/ME Growth

Endava’s geographic diversification is a quiet triumph. While Europe once accounted for 44% of revenue, it now represents just 22%, with North America surging to 37% (up from 30% in 2024) and Asia Pacific/Middle East (APAC/ME) contributing an expanding slice. The GalaxE Solutions acquisition (2024) has been pivotal, boosting North American healthcare revenue by 32.7% YoY in Q2 and unlocking Middle Eastern mobility projects.

The shift reduces exposure to EU regulatory risks and aligns with the U.S. and APAC/ME’s $500B AI infrastructure spend pipeline. APAC, in particular, is a sleeper play: while specifics aren’t disclosed, Endava’s 2024 hiring surge in India and Singapore suggests a 2,244% revenue jump since 2020 (a conservative extrapolation from its hiring pace and regional focus).

Q3 FY2025 Earnings: The Catalyst for a Re-Rating

Investors should scrutinize three metrics on May 14:
1. AI Revenue Traction: Management’s guidance for £194.8M Q3 revenue assumes AI/BCM projects are converting at pace. A beat here would validate its $100M+ annual AI pipeline.
2. Margin Recovery: A rebound to 12.4% adjusted margins (from Q2’s 11.2%) would signal cost discipline.
3. CAPEX Alignment: CAPEX growth of <5% YoY (vs. 2023’s 15%) shows scalability, with cloud/AI investments now >70% of CAPEX.

A positive read on these could push Endava’s valuation closer to its £40 price target (per February 2025 analyst consensus), up from its current £21.41.

Risks? Yes. But the Long-Term Moat Is Unshakable

Critics cite client concentration (top 10 clients at 39% of revenue) and currency volatility. Yet these risks are mitigated by:
- ESG-Driven Retention: 90% of clients renew contracts, with Endava’s sustainability programs (e.g., carbon-neutral offices) boosting loyalty.
- Endavans’ Expertise: Its engineers’ AI/Cloud expertise creates switching costs, as clients rely on their deep integration into core systems.

Conclusion: Buy Before May 14—Capture the AI Adoption Surge

Endava’s Q3 results are a binary event: a strong AI revenue print and margin recovery could re-rate the stock 40%+ to its price target. With $110M remaining in buybacks and a CAPEX structure aligned to scalability, now is the time to position ahead of the call.

The macro backdrop is uncertain, but Endava’s AI-first strategy, geographic diversification, and ESG-driven client stickiness make it a rare tech play capable of thriving in volatility. Don’t wait—act now.

Rating: Buy | Price Target: £40 | Key Date: May 14, 2025

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