hugomanenti95 @hugomanenti95: "Hi all, This post will be..."

Portugal

Hi all, This post will be the first of a series dedicated to our value investments. I hope you enjoy reading it. First up - Concentrix $CNXC (Concentrix Corporation) 𝗜. 𝗪𝗵𝗮𝘁 𝗱𝗼𝗲𝘀 𝗖𝗼𝗻𝗰𝗲𝗻𝘁𝗿𝗶𝘅 𝗱𝗼? CNXC is one of the largest customer experience ("CX") specialists globally. They design, build and run the customer interface on behalf of their clients. This includes creating a comprehensive CX strategy, building the relevant platforms (website, social, call centres, etc), optimising processes, and leveraging data for continuous improvement. Ever had to change airline tickets? Complain about a defective product? Make an insurance claim? Report social media content? Chances are that CNXC or one of their peers was on the other side. The benefit to CNXC’s clients is twofold – on one hand, improved customer engagement and satisfaction and on the other, cost optimisation. CNXC’s clients operate across a vast number of industries – technology, consumer electronics, travel, commerce, media, financial services, healthcare, etc. CX outsourcing has historically been a very stable business, with long and sticky contracts, growing in line with GDP. 𝘚𝘰 𝘸𝘩𝘺 𝘩𝘢𝘷𝘦 𝘴𝘩𝘢𝘳𝘦𝘴 𝘴𝘰𝘭𝘥 𝘰𝘧𝘧 𝘴𝘰 𝘮𝘶𝘤𝘩? 𝗜𝗜. 𝗧𝗵𝗲 𝗕𝗲𝗮𝗿 𝗖𝗮𝘀𝗲 Like its peers, CNXC is currently trading neat its all-time lows. The key reason for it is artificial intelligence (AI). AI will allow to automatise some of the interactions that customers have with companies. Think AI-powered chatbots. AI-processed insurance claims. AI-moderated social media. And more... According to the bears, this means that a large chunk of CNXC’s revenues could disappear as AI scales at an ever-cheaper cost. There is certainly truth to the thesis, as $TEP.PA (Teleperformance SE) (one of CNXC’s peers) estimated that 20% to 30% of its call volumes could be automated within the next three years. 𝗜𝗜𝗜. 𝗪𝗵𝘆 𝗜 𝗱𝗶𝘀𝗮𝗴𝗿𝗲𝗲 𝘄𝗶𝘁𝗵 𝘁𝗵𝗲 𝗯𝗲𝗮𝗿 𝘁𝗵𝗲𝘀𝗶𝘀 AI reminds me of the ascent of the internet 20+ years ago. CX companies faced the same narrative - that the internet and emails were going to make call centres redundant and gut the CX industry. Instead, it became a fantastic productivity tool that allowed companies to better serve customers and vastly improve processes. CX companies found new avenues of growth and margin expansion, which more than made up for the loss of certain low-value tasks. My view is that AI will prove to be a similar type of event. Certainly, some revenue will be lost, but there are limits to the use of AI: ❌ Most customers do not enjoy talking to robots and prefer human interaction ❌ AI lack of contextual / emotional awareness, inability to deal with complexity or newness ❌ Financial / regulatory / reputational risks of AI making wrong decisions / inappropriately handling data / going off-script The reality today, as reported by all CX providers, is that customers are reluctant to implement AI solutions due to the above reasons – the risk is seen as not worth the potential cost savings. So far, CX companies are instead using AI to supplement their workers – automatise repetitive tasks, provide high-quality data / analysis to support decision-making, better training etc. There are indeed several ways in which AI can benefit CX companies: ✅ Improving staff productivity, satisfaction and retention ✅ Upselling safe and limited AI strategies / products to clients ✅ Better customer outcomes – faster and more accurate decisions CX companies possess the data and experience to build better models than new entrants – as shown by the partnership between $MSFT (Microsoft) and $TEP.PA . Microsoft knows how to build AI models, but they need an industry partner to tailor those to the CX industry. Win-win! 𝗜𝗩. 𝗙𝗮𝗶𝗿 𝗩𝗮𝗹𝘂𝗲 𝗮𝗻𝗱 𝗖𝗮𝘁𝗮𝗹𝘆𝘀𝘁𝘀 A good way to understand the bear thesis is to look at what is implied by the company’s valuation. According to my calculations, the current share price assumes that Concentrix will lose 20% of its revenue over the next 4-5 years. Essentially, anything better than that should result in share price appreciation! My own model assumes a growth rate of 2% in perpetuity (slower that historical average as AI cannibalises some revenue), with moderate margin expansion. This gives me a fair value for the stock of ~ $150, almost 2x today’s price. So how can we get there? Several potential catalysts: ✅ Earnings – CNXC continuing to deliver steady growth and margin expansion will allay fears ✅ Showcasing the use of AI for internal efficiencies, as well as revenue opportunities will improve sentiment ✅ Strong cash generation allowing to repay debt and buy back shares 𝗖𝗢𝗡𝗖𝗟𝗨𝗦𝗜𝗢𝗡 Essentially, anything better than losing 20% of their revenues should provide us with positive returns. Given this year's guide of 1-3% growth, it is hard for me to accept the pessimism on the stock. This could be a 2x winner, and even more if CNXC is able to use AI to its benefit. Keen to hear your thoughts!

AI will kill the CX industry

100.00%

The effect will be limited

100.00%

AI is an opportunity

100.00%

4 Mentioned

CNXC

Concentrix Corporation