Endava plc (DAVA): Assessing the Value Behind the High P/E Ratio and AI-Driven Transformation

In the world of technology stocks, few stories are as intriguing as Endava plc (DAVA). The company has seen its share price lag behind broader market gains in 2025, with investors seemingly cautious about its valuation metrics. As of August 2025, DAVA trades at a P/E ratio of 25.40 - significantly lower than its 10-year historical average of 66.27, but still higher than the industry average of 26.8x. This valuation discrepancy raises the critical question: is the market underestimating Endava's transformation into an AI-native enterprise?

The answer lies in the company's strategic pivot toward AI-driven digital transformation. Endava's Q3 FY2025 results tell a compelling story of progress. Revenue reached £194.8 million, up 11.7% year-over-year, while adjusted diluted EPS surged 54.5% to £0.34. These figures outperformed both guidance and industry expectations, despite macroeconomic headwinds that delayed large contract conversions. The company's management has been proactive in addressing these challenges, authorizing an additional $50 million in share repurchases and demonstrating confidence in its long-term cash flow prospects.

What sets Endava apart is its AI-native approach. The company isn't just adding AI features to existing services - it's fundamentally rearchitecting its business model around AI capabilities. This includes:

1. AI-Driven Core Modernization: Developing tools like Galaxy to help clients transform legacy systems
2. Agentic AI Solutions: Creating teams of AI agents that deliver higher quality and reliability in enterprise solutions
3. Strategic Partnerships: Collaborating with AI leaders like Open AI and Google to deliver cutting-edge solutions

These initiatives position Endava to capture a significant share of the $1.8 trillion digital transformation market, which is expected to grow at a 17% CAGR through 2030. The company's focus on large deal execution is particularly promising, with both the number and size of transformation programs increasing year-over-year.

The current P/E ratio of 25.40 appears modest when considering Endava's forward-looking potential. While this is below its historical average, it's important to note that the company has been restructuring its business to prioritize long-term value creation over short-term earnings. The forward P/E ratio of 7.83 suggests that the market is pricing in future earnings growth that outpaces the current valuation.

This valuation discount could be particularly attractive given Endava's strong balance sheet and strategic positioning. With £68.3 million in cash and a disciplined share repurchase program, the company is well-positioned to navigate market volatility while investing in its AI transformation. The recent $50 million share repurchase authorization, combined with $60.3 million remaining in the program, demonstrates management's confidence in the company's intrinsic value.

For investors willing to look beyond short-term volatility, Endava presents a compelling opportunity. The company's guidance for FY2025 includes 6-6.5% revenue growth and adjusted diluted EPS in the range of £1.11-1.13. These figures, combined with its AI transformation initiatives, suggest that the current valuation may not fully reflect its long-term potential.

The key risks to consider include the pace of AI adoption by enterprise clients and the competitive landscape in digital transformation services. However, Endava's first-mover advantage in AI-native solutions, combined with its strong client retention rates and expanding opportunity pipeline, provides a solid foundation for growth.

For a diversified portfolio, DAVA offers an intriguing mix of near-term stability and long-term growth potential. The company's strong operating margins, demonstrated by a 12.6% adjusted profit margin in Q3, provide a buffer against market volatility. At the same time, its AI transformation initiatives position it to benefit from the multi-year digital transformation wave sweeping across industries.

Investors should monitor key metrics including the conversion rate of its £3.4 billion opportunity pipeline, the adoption rate of its AI-native solutions, and the company's ability to maintain its gross profit margins above 27%. These indicators will provide early signals about Endava's progress in executing its transformation strategy.

In conclusion, while DAVA's stock price may appear underperforming in the short term, the fundamentals tell a different story. The company is transforming from a traditional digital services provider into an AI-native enterprise, with strong financials, a disciplined management team, and a clear path to long-term value creation. At current valuation levels, Endava represents a compelling investment opportunity for those willing to think beyond the next quarter's earnings report.

For investors seeking exposure to the AI-driven digital transformation wave, DAVA offers a unique combination of established capabilities and forward-looking innovation. While the stock may not offer the explosive growth of a pure-play AI company, it provides a more balanced approach to capital appreciation through its diversified services model and strategic AI integration.