Globant: Be careful and wait for a security update (NYSE: GLOB)

Some may have heard of the March 30, 2022 cyberattack against Globant SA (NYSE: GLOB) Computer Systems by Lapsus$, a hacking group. Now with increased monetization of cyber crimes through ransomware where corporate data is encrypted and rendered useless by hackers until thousands of dollars were paid to them, it is unusual that the company only suffered a data leak without any damage to its software itself.

So this seemingly minor incident may be the reason why, after a brief dip below the $240 level, the stock quickly recouped some of its losses to trade in the $263-$264 range the following day. , as shown in the graph below.

However, I view this market reaction as complacent given the misconduct, and with this thesis I assess whether investors are right to invest in the stock or whether they should be more cautious. First, I’m trying to figure out how this little fish manages to thrive in a market full of big sharks.

The reason for the strong growth of Globant

Globant is an IT consulting and software development company with a market capitalization of $11.5 billion. It generated $1.4 billion in revenue in 2021 after recording a 59.32% year-over-year increase. Despite such rapid growth, with more than 23,500 employees worldwide, Globant is profitable. This is in stark contrast to the other software companies I’ve covered for SA, which are also growing rapidly but generating less revenue than they spend on human resources and marketing.

The company has reported stable revenue over the past nine years and ended 2021 with an operating profit of 12.35%. This can be explained by the prominent client list which includes London Metropolitan Police, Rockwell Automation (ROK), Autodesk (ADSK), Banco Santander (SAN), Interbank and many more. These companies have the ability to pay big bucks for services and normally award contracts to bigger IT consulting players like Accenture (ACN) and Wipro (WIT), but still choose Globant.

Therefore, there should be a strong differentiator as to why Globant, despite its relatively smaller market capitalization of just $10.35 billion, not only manages to hold its own against Accenture (valued at $214.38 billion), but also to thrive with quarterly growth figures close to 60%.

On the industry side, companies are looking for IT consultants to support them through their digital transformation journey. In this case, in order to differentiate itself from larger competitors with significantly larger sales and marketing budgets, Globant needed to go further than others in applying the technology. In this regard, I listened to a presentation by CEO Martin Migoya recorded in November 2019 entitled “Reinventing Digital: 3 Steps to Succeed in the Jungle”. Here, I discovered that the company started by applying AI and predictive analytics to its functions, such as coding, which involves writing lines of instructions using a programming language.

Going into detail, Globant’s strategy has been to use AI to create algorithms to actually understand the functions that the code performs, rather than having to go through the less productive and time-consuming tasks of writing descriptors that describe what the code actually does.

This means a higher degree of automation and the use of fewer working hours for software development, which translates into a better competitive position.

Competition and risks

Additionally, predictive analytics is applied to the recruitment process, reducing the likelihood of staff leaving the company. Diving into its organizational structure, the company has also mapped out a clear career path for all of its staff and also encourages continuous learning through Globant University. These are helpful stories to tackle the “big quit” dilemma facing employers, especially in the United States, where many employees simply don’t want to return to corporate office after being addicted to work at home since Covid.

In fact, Globant’s churn rate was just 18.7% in the last reported quarter. This compares favorably to one of its competitors, Cognizant (CTSH), as shown in the IDC chart below. Cognizant’s rate peaked at 37% in Q3 2021, compared to less than 25% in 2020.

Additionally, Globant’s predictive algorithms, which also use past experiences to ensure employees stick to their jobs instead of moving on to the competition, have enabled the company to retain top talent – those who make the difference when dealing with customers. This has resulted in a leadership position alongside some big names in the software development and consulting space, as shown in the leader circle above.

On the other hand, this leading position could be damaged after the company confirmed that it had been hacked on March 30 in a news update, as shown in the excerpt below. below.

Although Globant’s software or infrastructure was not compromised and the Lapsus$ hacking group consists mostly of teenagers who appear to be practicing their password-cracking skills and trying to achieve fame, the incident was nevertheless treated as a cybercrime by the British police. Some of the perpetrators have been arrested.

For Globant, this means that the damage is significant from a trust perspective, as it shows that there is a vulnerability in its own cybersecurity protection.

The problem may be exacerbated by hostile state actors who now know the vulnerabilities (including some leaked credentials) of using Globant’s software. They can gain access to their customers’ computer systems in what is known as a supply chain attack. This is where hackers use workarounds to compromise their targets instead of orchestrating a direct attack. Such was the case when seemingly innocuous monitoring software from SolarWinds (SWI) was used to negatively impact Microsoft’s Active Directory (NASDAQ:MSFT) during Sunburst attacks in December 2020.

Evaluations and key points

At that time, SolarWinds shares had fallen more than 25%. Therefore, the potential downside risks are why investors should wait for a full update on the measures that Globant has put in place to prevent such an attack in the future. Details of the cybersecurity companies protecting the company’s IT assets must also be disclosed, along with the reason why no alerts were raised, as proof of the hack was only obtained by torrentused for distributing files over the Internet.

When it comes to valuations, operating in a sector that is expected to see more than $10 trillion in spending over a five-year period, Globant, despite the risks, is certainly not a stock to ignore. With its ability to use AI for predictive analytics, Globant’s services are likely to be in continuous demand as companies move into the next phase of digital transformation, a phase where more actionable functions are required. .

Along the same lines, Globant’s growth, gross profit margin and debt ratios are superior to those of its peers (table below). Also, with its presence in Indiaaccess to the pool of relatively cheaper Indian software developers is an asset in dealing with the high salary inflation prevailing in the United States

Regarding my view on the stock, investors will notice that I am neither bearish nor calling for a sell. In fact, Globant is more of a hold for now due to its competitive strength in the IT consulting and software industries. Also, to be realistic, cyberattacks do happen and the kids of Lapsus$ can also brag about having the mighty Microsoft on their listing of successful hacks.

Finally, this statement from Globant is not sufficient given the threats hanging over American and Western interests after the escalation of the conflict in Eastern Europe. This is especially true considering that Globant’s customers include entities such as banks and government agencies that are prime targets for hackers. Thus, it is best to be on the safe side and not resort to dip buying until the company releases a comprehensive security update.