What a brutal six months it’s been for Grid Dynamics. The stock has dropped 41.7% and now trades at $11.85, rattling many shareholders. This may have investors wondering how to approach the situation.
Is now the time to buy Grid Dynamics, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Grid Dynamics Not Exciting?
Despite the more favorable entry price, we're cautious about Grid Dynamics. Here are three reasons why you should be careful with GDYN and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
With $371.2 million in revenue over the past 12 months, Grid Dynamics is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Grid Dynamics, its EPS declined by 8.5% annually over the last two years while its revenue grew by 7.8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Grid Dynamics’s five-year average ROIC was negative 23.3%, meaning management lost money while trying to expand the business. Its returns were among the worst in the business services sector.
Final Judgment
Grid Dynamics isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 30.6× forward P/E (or $11.85 per share). At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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