Endava: A Contrarian Gem in a Sea of Pessimism

The market’s reaction to Endava’s (NYSE: DAVA) Q1 2025 earnings was swift and severe—shares plummeted 18% in after-hours trading, reflecting panic over slowing revenue growth and downgraded forecasts. Yet beneath the noise lies a compelling contrarian opportunity: a stock priced for perpetual stagnation, yet positioned to capitalize on AI-driven software demand, structural margin improvements, and a newly initiated buyback program. With a valuation gap widening between near-term pessimism and long-term potential, now is the time to consider Endava as a strategic contrarian buy.

The Valuation Disconnect: A 36% EPS Forecast Cut, but a 10x P/E Multiple?

Analysts slashed their 2026 EPS forecasts by 36% following Endava’s Q1 results, yet the stock now trades at just 10x its revised 2026 EPS estimate of $1.80. This compression ignores two critical facts:
1. The EPS Beat Was Real: While revenue missed expectations, Endava’s adjusted EPS of £0.34 beat estimates by 9.57%, driven by disciplined cost management and operational efficiency.
2. Growth Catalysts Remain Intact: The company’s AI partnerships (OpenAI, AlixPartners) and geographic diversification (North America now 39% of revenue) align with $1.2 trillion in annual enterprise software spending, a market growing at 8-10% annually.

Why the panic? Investors focused on a 9% revenue decline in the Technology vertical and a 1% drop in constant-currency revenue. But this overlooks the structural advantages that Endava retains:
- Client Diversification: The top five clients now account for just 12% of revenue, down from 18% in 2022, reducing exposure to sector-specific downturns.
- Margin Resilience: Even with headwinds, adjusted margins held steady at 16%, supported by automation and offshore delivery efficiencies.
- Buybacks at Work: Endava’s $100 million share repurchase program (with $60.3 million remaining as of April 2025 and an additional $50 million authorized) is set to reduce the share count by ~3-5% annually, amplifying EPS growth.

AI as the Catalyst: From Defensive to Offensive Growth

Endava’s AI-driven software solutions—think generative AI platforms for financial services and healthcare—represent a $200 million revenue opportunity by 2027, per management’s guidance. This isn’t speculative; the company’s work with OpenAI to build custom AI tools for clients like PayPal and Siemens underscores its position as a Tier-1 partner in enterprise AI adoption.

Analysts at Needham and BofA, while cautious on near-term revenue, acknowledge this tailwind:
- Needham’s $18 price target assumes 20% EPS growth in 2026, achievable if AI adoption accelerates.
- BofA’s $20 target factors in margin expansion as AI projects (with ~40% gross margins) scale.

The $52 upside target cited by bulls assumes Endava can achieve its full 2027 AI revenue goals and resume top-line growth at 8-10%, returning its P/E multiple to the sector’s 15x average.

The Contrarian Play: Buy the Dip, Own the Upside

Endava’s current valuation is a textbook contrarian setup:
- Undervalued at 10x 2026 EPS: Even with conservative estimates, shares are priced to fail—a stark contrast to its 25x multiple in 2021 when growth expectations were half of today’s AI-driven trajectory.
- Buybacks Create Asymmetric Risk/Reward: Every $1 spent on buybacks reduces the EPS dilution from macro headwinds while locking in gains if the stock rebounds.
- Optionality in AI: The market has yet to price in the potential of Endava’s AI partnerships, which could unlock recurring revenue streams and cross-selling opportunities.

Risks? Yes, but Priced In

Bearish concerns—client spending delays, forex volatility, or execution risks—are valid but already reflected in the stock’s 41% decline over six months. The $17 price floor (Needham’s floor) provides a margin of safety, while the AI narrative offers a lever to re-rate the stock.

Final Call: Buy Now, Reap Later

Endava’s stock is a rare blend of undervalued assets and transformative growth vectors. The near-term revenue headwinds are real but temporary, while the AI-driven secular tailwind is structural and durable. With buybacks in motion and a valuation gap wide enough to drive a truck through, this is a once-in-a-cycle opportunity to position for 2026 and beyond.

Action Items:
1. Buy DAVA at current levels ($24 as of May 16, 2025).
2. Set a $17 stop-loss (Needham’s conservative target).
3. Target $52+ if AI adoption and buybacks deliver as expected.

The market’s focus on short-term noise has created a mispricing that won’t last. Endava’s stock is a contrarian’s dream—a company with the tools to outperform, priced for perpetual underperformance. The time to act is now.