🤖📈 Top Trade Ideas for July 28

EPAM Systems is an IT service provider that competes with companies like Accenture and has successfully de-risked by exiting Russia and reducing exposure to volatile countries. However, the company recently reduced its guidance for 2023 due to slow IT spending and clients deferring projects. EPAM has achieved double-digit revenue growth every year since its IPO in 2012, but its net employee growth has been stagnant due to losses in Russia and Ukraine. There is a debate among investors about whether EPAM and other IT services providers are winners or losers in the AI space. Despite these challenges, EPAM is available at a depressed valuation and has a strong balance sheet with net cash and a share repurchase authorization. The IT services industry is experiencing growth due to increasing IT spends and outsourcing, and Gartner predicts that organizations will rely more on external consultants in the future. EPAM has competitive advantages in scale and culture, and it is well diversified within verticals, mitigating concentration risks. The company has a strong culture of engineering excellence and innovation, and it invests ahead of new technologies to stay relevant with clients. EPAM has successfully integrated acquisitions to gain expertise and clients, but its engineering-heavy culture has made it challenging for the company to evolve into a more integrated practice. The author believes that EPAM will thrive in the AI era, as the deployment of AI is hindered by outdated technology systems and infrastructures, which EPAM is praised for modernizing. AI is expected to be a tailwind for the trend of IT outsourcing, and IT services firms like EPAM are well-positioned to seize new opportunities. EPAM is considered a high-quality founder-led business that is expected to return to growth in a few quarters. However, the economic cycle poses a risk to IT service providers like EPAM.

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Microsoft reported strong Q4 FY23 results, with EPS growing 12% in FY23 and 23% in Q4. The company's key segments, Productivity & Business Processes and Intelligent Cloud, showed upward revenue trajectories, while the More Personal Computing segment saw a decline in revenues. Microsoft's total Commercial remaining obligation increased by 18% year-on-year. The company's Adjusted EBIT and Adjusted EPS grew double-digits in FY23, but growth rates were lower after currency headwinds. The Q1 FY24 outlook implies continued revenue growth for enterprise-focused segments and a decline in Personal Computing. Microsoft's management expects to maintain a flat Adjusted EBIT margin for FY24 through cost control. However, there were signs of deceleration in some of Microsoft's businesses in Q4, particularly in Server Products & Cloud Services, Azure & Other Cloud Services, and Linkedin. The author expresses concern about near-term cashflow headwinds from CapEx and tax for Microsoft. Despite this, Microsoft's earnings are expected to grow substantially over time due to recurring revenues and market share gains. The author recommends buying Microsoft shares and projects a total return of 45% by June 2026.

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Eneti, formerly known as Scorpio Bulkers, has divested its main business line and acquired a wind turbine installation vessel (WTIV) business called Seajacks. They have also announced a merger with Cadeler, another WTIV company, which will make them the dominant player in the industry. Eneti’s stock is trading 10-15% below the merger price with the merger expected to close in Q4. This provides opportunity for a short-term gain, but the author believes there are much bigger long-term gains to be had. The demand for WTIVs is being driven by the offshore wind industry, which is experiencing significant investments globally. The global offshore wind power capacity is projected to increase substantially by 2030, and governments worldwide are supporting its growth. The WTIV industry has various moats, such as scarcity, intellectual property, and switching costs. Eneti and Cadeler have high operating margins, and the merger will create the world's largest fleet of WTIVs. Eneti presents a better investment opportunity due to its lower EV/EBITDA multiple and better capitalization. The merger arbitrage gap provides a quick return for investors, and expected synergies and newbuilds are projected to quadruple EBITDA by 2027. Eneti has restructured debt terms and plans to sell non-core ships, providing additional cash. There is potential for an increased multiple and lower cost of capital. Both Eneti and Cadeler have large order backlogs, and the offshore wind sector is an overlooked opportunity for investors. Eneti is well-positioned in the value chain and offers a unique investment opportunity.

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