Globant S.A. is living proof of the old adage, "Beauty is only skin deep." Just scratch the surface of this Luxembourg company and you'll find enough Quasimodo-esque characteristics to send this stock running into an ugly, rapid decline.
Indeed, Globant's SEC filings are unique as it conjures up beautiful – and vague – visions of the business: "Globant (NYSE: GLOB)is a digitally native technology services company. We dream and build digital journeys that matter to millions of users. We are the place where engineering, design, and innovation meet scale."
Plow through all that dreamy stuff and investors find a company with a bank of computer programmers and design support people primarily working out of the main office in Argentina.
Investors may find other viewpoints here. Meanwhile, diligent investors can see growing risks are tarnishing Globant's glowing digital dream, including:
*1. Limited Recurring Revenue
Though it has attracted customers such as Coca-Cola and LAN Airlines, Globant must operate within an atmosphere of transient customers and short-term contracts.
What happens is that Globant wins these one-time projects but once they're done, they're done. The customer says "Thanks," pays up and takes the project in-house to save on costs. Globant clearly concedes that risk to revenue on page 21 as it describes "a decision by that client to move work in-house."
Alternatively, Globant says the customer may decide to move work "to one or several of our competitors."
Company filings describe the risky short-term nature of most contracts:
"…most of our client contracts are limited to short-term, discrete projects without any commitment to a specific volume of business or future work, and the volume of work performed for a specific client is likely to vary from year to year, especially since we are generally not our clients’ exclusive technology services provider. A major client in one year may not provide the same level of revenues for us in any subsequent year."
Globant has been handling some Google projects, including the recent hardware related project trial called Project Ara. This trial has no time table attached and provides a pretty good example of how companies use Globant on a project basis.
In a recent note to BWS Financial investors, Hamed Khorsand beautifully explained Google's project-based use of Globant … and the associated risk:
"The project based approach leads us to believe that the Street is not valuing the business risk concisely and leaves investors vulnerable to the downside especially when the competitive landscape is changing.
"It also does not mean GLOB would be able to sustain 20 percent or 30 percent growth in an industry that grows at less than 10 percent a year," wrote Mr. Khorsand.
So Globant's services, in our opinion, cannot generate the kind of recurring revenue that is so crucial to a viable future.
*2. Reinventing The Wheel
So the short-term nature of the technology services business is forcing Globant to find new customer after new customer.
Unfortunately, this constant grinding away each day to reinvent the wheel is beginning to show on the company.
Globant says so itself.