Key insights
- Jefferies maintains a cautious outlook on the digital IT services sector, citing increased downside risk to demand. Companies are delaying spending on new projects, awaiting next-generation AI technology and its deflationary impacts. This cautious spending environment, coupled with uncertain growth acceleration, suggests limited upside for valuations despite recent de-ratings. The analysis points to potential headwinds for IT service providers like EPAM and Grid Dynamics in the near term.
Investing.com -- Jefferies has reiterated a cautious stance on the IT services sector, downgrading EPAM Systems (NYSE: EPAM) and Grid Dynamics (NASDAQ: GDYN) to Hold while warning that the demand environment carries more downside risk than upside as artificial intelligence continues to reshape the industry.
Analyst Surinder Thind told investors in a note that first-quarter results were largely in line with expectations, but full-year guidance remained back-half weighted. This is seen as a sign that clients are pulling back on near-term spending.
"Clients are waiting for the next generation of technology and its deflationary impacts, which is hindering willingness to spend on new projects," Barclays wrote, adding that the dynamic is fueling growing market concerns around terminal value.
The bank added that it is "incrementally more negative in the near term" on its digital IT services coverage, which includes EPAM, Grid Dynamics and Globant.
For EPAM, Barclays cited a challenging path back to sustainable double-digit organic revenue growth. For Grid Dynamics, exposure to the retail industry raises the risk that growth will not accelerate as expected.
Valuations have de-rated sharply, with the group trading at an average price-to-earnings multiple of 9 times and 8 times on 2026 and 2027 estimates, respectively, following a 30% to 35% decline year-to-date.
But Barclays said cheap multiples alone are unlikely to attract investors. "Multiples are unlikely to expand without a material acceleration in organic growth, the timing of which is uncertain," the bank stated.
Barclays also upgraded Everforth to Hold, saying the market is pricing in negative long-term growth that the bank views as overly pessimistic.