Grid Dynamics (GDYN)

Digital transformation consultancy Grid Dynamics (NASDAQ:GDYN) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 25.8% year on year to $100.4 million. The company expects next quarter’s revenue to be around $101 million, close to analysts’ estimates. Its non-GAAP profit of $0.11 per share was 24.9% above analysts’ consensus estimates.

Company Overview

With engineering centers across the Americas, Europe, and India serving Fortune 1000 companies, Grid Dynamics (NASDAQ:GDYN) provides technology consulting, engineering, and analytics services to help large enterprises modernize their technology systems and business processes.

IT Services & Consulting companies stand to benefit from increasing enterprise demand for digital transformation, AI-driven automation, and cybersecurity resilience. Many enterprises can't attack these topics alone and need IT services and consulting on everything from technical advice to implementation. Challenges in meeting these needs will include finding talent in specialized and evolving IT fields. While AI and automation can enhance productivity, they also threaten to commoditize certain consulting functions. Another ongoing challenge will be pricing pressures from offshore IT service providers, which have lower labor costs and increasingly equal access to advanced technology like AI.

Grid Dynamics competes with emerging digital services companies like Globant, Endava, EPAM Systems, and Thoughtworks; large global consulting firms such as Accenture and Capgemini; and India-based IT services providers including Cognizant, Infosys, and Wipro.

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years.

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.

As you can see below, Grid Dynamics grew its sales at an incredible 24.4% compounded annual growth rate over the last five years. This is an encouraging starting point for our analysis because it shows Grid Dynamics’s demand was higher than many business services companies.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. Grid Dynamics’s annualized revenue growth of 7.8% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Grid Dynamics reported robust year-on-year revenue growth of 25.8%, and its $100.4 million of revenue topped Wall Street estimates by 2%. Company management is currently guiding for a 21.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 15% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and suggests its newer products and services will catalyze better top-line performance.

Grid Dynamics’s high expenses have contributed to an average operating margin of negative 2.9% over the last five years. Unprofitable business services companies require extra attention because they could get caught swimming naked when the tide goes out.

On the plus side, Grid Dynamics’s operating margin rose by 9 percentage points over the last five years, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.

In Q1, Grid Dynamics generated a negative 2% operating margin.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Grid Dynamics, its EPS declined by 8.1% annually over the last five years while its revenue grew by 24.4%. However, its operating margin actually expanded during this time, telling us that non-fundamental factors such as interest expenses and taxes affected its ultimate earnings.

We can take a deeper look into Grid Dynamics’s earnings to better understand the drivers of its performance. A five-year view shows Grid Dynamics has diluted its shareholders, growing its share count by 196%. This dilution overshadowed its increased operating efficiency and has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Grid Dynamics reported EPS at $0.11, up from $0.07 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Grid Dynamics to perform poorly. Analysts forecast its full-year EPS of $0.41 will hit $0.42.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Grid Dynamics has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.9% over the last five years, better than the broader business services sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Grid Dynamics’s margin dropped by 1.1 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Grid Dynamics has shown solid business quality lately, it struggled to grow profitably in the past. Its five-year average ROIC was negative 22.8%, meaning management lost money while trying to expand the business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Grid Dynamics’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.

Companies with more cash than debt have lower bankruptcy risk.

Grid Dynamics is a well-capitalized company with $325.5 million of cash and $6.27 million of debt on its balance sheet. This $319.3 million net cash position is 26.9% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Grid Dynamics blew past analysts’ EPS expectations this quarter. We were also glad its full-year revenue guidance exceeded Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $14.04 immediately after reporting.

Updated: May 16, 2025 at 11:53 PM EDT

Before deciding whether to buy Grid Dynamics or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Grid Dynamics isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s rising returns show management's prior bets are at least better than before, the downside is its projected EPS for the next year is lacking.

Grid Dynamics’s P/E ratio based on the next 12 months is 35.4x. At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $18.25 on the company (compared to the current share price of $14.35).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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