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Thoughtworks stock raced 50% higher after its IPO. It could be the start of a massive rally, or it may have peaked too soon.
If it's climbing higher, it's a stock to buy sooner than later. We'll tell you the deal...
Thoughtworks Holdings Inc. (NASDAQ: TWKS) shares went for $21 at its IPO price, then it started trading at $26. Both numbers were greater than the target range of $18 to $20.
As a result, the IPO raised $344 million on 16.4 million shares. The company's value came in at a $9 billion market cap.
A higher than expected valuation can be good or bad news for an IPO stock. Sometimes, an early rush to a stock can spell a big drop later if the company is not as valuable as first thought.
Of course, if the market values the stock correctly, the earlier you buy, the better.
Let's talk about it.
What Is Thoughtworks?
We know Thoughtworks is an important name in an industry set to boom over the next decade.
Business started booming for technology consultants back in 1993, when Thoughtworks was founded.
This Chicago-based company helped kick off the technology consulting industry and today has grown to a multinational corporation with 9,000 employees.
And the rate of technological evolution is not slowing down any time soon. In fact, the tech landscape grows more and more confusing each day for business owners that might not be so tech savvy.
Moving forward, executives will need to address artificial intelligence, machine learning, Big Data, and even virtual reality problems.
Those leaders need help. And Thoughtworks provides that by helping them incorporate technology strategies to grow their businesses online.
But it also does much more than that. Here are the opportunities that lie ahead for Thoughtworks stock and whether you should consider buying when the time comes.
Why Thoughtworks Stock Has More Upside
Companies have always struggled to adapt to the latest technological trends. So, they've always sought consultants to help them do that.
But tech development is accelerating, and recent events have accelerated demand for even further tech development.
The need for technology consultants was made no more apparent than during the COVID-19 lockdowns. People needed solutions to communicate and carry on their business virtually.
Right now, less than 30% of organizations have a roadmap for modernizing their business infrastructure. By 2023, IDC says 75% will have that roadmap, which is a wide-open door for Thoughtworks.
According to MarketsandMarkets, digital transformation spending could grow from $470 billion to $1 trillion in the next five years.
Much of that is likely to fill Thoughtworks' top line.
But how does that impact the company's bottom line? Here's your answer...
Is Thoughtworks Profitable?
Thoughtworks is profitable. In 2020, they raked in $79 million net income, thanks to the novel issues raised by pandemic lockdowns.
The $79 million was almost triple the profits from the prior year, a 178% increase from $28 million in 2019.
That said, profits aren't everything. You want to go by the holistic picture.
And it turns out that, while the company's profits tripled, their cash flow has been cut in about half. In June 2021, they reported cash flow of $216 million, down 56% from 491 million at the end of 2020.
Granted, the first number was only measuring the halfway point of the year. But the higher cash flow was also due to an anomaly - the pandemic - that is not certain to repeat itself as more is learned about managing the virus.
The company is certainly working to expand its cash flow, increasing assets more than 60% over the last year, from $1 billion to $1.5 billion.
The reduction in cash flow comes from increased liabilities, which tends to happen when a company pushes for aggressive growth - which is not surprising if Thoughtworks spotted an opportunity during the pandemic.
All of this considered, here's whether you should look into buying Thoughtworks stock.
Should You Buy Thoughtworks Stock?
Thoughtworks stock has hit $30 after an IPO price of $21, almost a 50% gain. Needless to say, the market likes the idea of digital transformation.
And the market could be onto something.
Again, this is one of the leading brands in the tech consulting space. Its customers include big names like German carmaker Daimler AG, digital payments giant PayPal Inc. (NASDAQ: PYPL), the grocery store chain Kroger Co. (NYSE: KR), and more.
And for an older company, their growth makes it look like they're just getting started.
Thoughtworks CFO Erin Cummins says their market is "expected to double by 2025."
So, in short, yes, there's a "buy" case for Thoughtworks. The question is when to buy.
Since we're only a day into its public trading, it might be a good idea to let some of the early market hype shake out before jumping into the stock.
Of course, there's a chance it may never turn back around. If you fear that scenario, investors would be smart to jump on shares as soon as they can.
If the projection from their CFO is correct - and it seems in line with the wider market predictions across the web - Thoughtworks stock may not stay as low as $30 for much longer.
In the end, it's a buy on digital transformation. Whether that's now or in a few weeks is up to you.
But while you wait for the market to settle down around Thoughtworks, this tech stock is an immediate buy...
One Stock to Buy Instead of Thoughtworks
About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.