EPAM’s stock price has taken a beating over the past six months, shedding 39.1% of its value and falling to $162.00 per share. This might have investors contemplating their next move.

Is now the time to buy EPAM, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is EPAM Not Exciting?

Even though the stock has become cheaper, we don't have much confidence in EPAM. Here are three reasons why we avoid EPAM and a stock we'd rather own.

1. Weak Constant Currency Growth Points to Soft Demand

In addition to reported revenue, constant currency revenue is a useful data point for analyzing IT Services & Consulting companies. This metric excludes currency movements, which are outside of EPAM’s control and are not indicative of underlying demand.

Over the last two years, EPAM’s constant currency revenue averaged 2.1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. EPS Growth Has Stalled Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

EPAM’s flat EPS over the last two years was worse than its 2.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

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. Unfortunately, EPAM’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

EPAM isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 14× forward P/E (or $162.00 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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