Issue #114

Trading at a discount with massive upside. Inside the data and engineering backbone of AI.

The AI transformation has moved past the era of "proof of concepts" and entered the era of industrial-scale implementation. For the world’s largest enterprises, the challenge is no longer just "using AI," but re-engineering their entire operational DNA to survive in an automated economy. This shift is creating a massive tailwind for the architects of digital infrastructure—the firms that don’t just build apps, but rewire how global business functions.

As 2026 unfolds, the market is separating the AI pretenders from the AI-native powerhouses. The focus has shifted to two critical pillars: the data-first intelligence that automates complex decision-making, and the high-end engineering expertise required to build the next generation of AI platforms.

👉 One company has become the go-to "AI-led" operator for the insurance and healthcare giants, embedding proprietary intelligence into the very core of global commerce.

👉 The other is the "Engineering DNA" of the Fortune 500, a software powerhouse that is quietly building a $600 million AI-native revenue stream by solving the world's toughest technical puzzles.

👉 Both are deeply undervalued, aggressively buying back their own shares, and sitting on a mountain of analyst "Buy" ratings.

In this edition, we break down the data brain and the engineering backbone of the modern enterprise—and why these two IT stocks are the essential foundation for any AI-forward portfolio in 2026.

ExlService (NASDAQ: EXLS)

ExlService (NASDAQ: EXLS) is a global leader in data analytics and digital operations, specializing in transforming business models through the integration of Artificial Intelligence (AI) and deep industry expertise. Unlike traditional outsourcing firms, EXL focuses on "AI-led" services, embedding proprietary technology into the mission-critical workflows of some of the world’s largest corporations across insurance, healthcare, banking, and retail.

Business Model and Revenue Streams 📦

EXL’s business model is centered on being a "data and AI-first" partner. The company has moved beyond simple labor arbitrage, instead providing complex, high-value solutions that leverage its EXLerate.ai platform and generative AI agents to solve specific industry problems. The company primarily generates revenue through four key segments:

Insurance: This remains EXL’s largest vertical, representing over a third of its total revenue. The company manages core operations for carriers, ranging from claims processing to underwriting analytics, increasingly using AI to automate routine tasks and improve risk assessment.

Healthcare and Life Sciences: A high-growth segment that accounts for roughly 25% of revenue. EXL provides payment integrity services, clinical data management, and AI-driven pharmacy benefit analytics, helping clients manage rising costs and complex regulations.

Banking, Capital Markets, and Diversified Industries: This segment covers everything from fraud detection in banking to customer experience management in retail and utilities. It relies heavily on data-led transformations to drive efficiency for clients.

Data and AI-Led Services: While not a standalone segment, this is a critical metric for investors. These services now represent 57% of total revenue and are growing at over 20% year-over-year. By embedding AI into every client engagement, EXL creates a "sticky" ecosystem where its software becomes essential to the client’s daily operations.

ExlService’s performance is significantly influenced by macroeconomic trends, particularly interest rates and labor policies. As a global operator, it is sensitive to wage inflation in markets like India, where new labor codes in 2026 are expected to increase employee costs. However, the current high-rate environment has actually benefited EXL in some ways; as corporations look to cut costs and improve efficiency to offset inflation, they increasingly turn to EXL’s AI-driven automation to replace expensive manual processes.

Recent Performance and Corporate Developments 📈

EXL closed out 2025 with strong momentum, consistently beating analyst expectations and setting a bullish tone for 2026.

Q4 2025 Financial Highlights: 💰

• Total Revenue: The company reported $542.6 million for the fourth quarter, a 12.7% increase year-over-year, surpassing market projections.
• Net Profit and EPS: Adjusted Diluted EPS came in at $0.50, up 15% from the previous year, beating the consensus estimate of $0.43.
• Full-Year Success: For the total year of 2025, revenue reached $2.09 billion (up 13.6%), with a GAAP diluted EPS of $1.54.
• Segment Growth: The Healthcare segment was a standout performer in late 2025, growing 26.2% year-over-year, while Insurance grew steadily at 7.2%.

Strategic Initiatives and Mergers: 🤝

In early March 2026, EXL announced a massive expansion of its agentic AI suite, powered by NVIDIA technologies. This upgrade includes over 250 pre-built AI agents designed to automate claims processing and decision intelligence in regulated sectors. On the corporate side, while no major mergers were finalized in early 2026, the company announced a $500 million share repurchase program and an immediate $125 million accelerated buyback agreement, signaling management's confidence in their stock's value.

Profitability and Fair Value 🎯

EXL maintains a very healthy profitability profile, with adjusted operating margins holding steady at 19.5%. The company’s focus is now on "operational leverage"—using AI to handle higher volumes of work without a proportional increase in headcount, which helps protect margins against global wage inflation.

Regarding fair value, many analysts believe EXLS is trading at a significant discount. With a P/E ratio currently around 20.15 and a PEG ratio of roughly 0.62, the stock is priced lower than its historical growth would suggest. Internal fair value models and independent research reports estimate the stock’s intrinsic value is closer to $41.71, representing an upside of nearly 35% to 40% from its current trading price of approximately $31.00.

Analyst Estimates and Ratings 📊

Consensus Rating: The consensus among analysts is a "Strong Buy." Out of 13 major analysts covering the stock, 12 maintain "Buy" or "Strong Buy" ratings, with only one "Hold" and zero "Sells."

Price Target: The average 12-month price target is $43.67, with the most optimistic analysts setting targets as high as $60.00. Even the most conservative targets ($34.00) sit comfortably above the current market price, highlighting a rare moment of analyst alignment.

Investor-Focused Takeaway: Is EXLS Right for Your Portfolio?

EXL offers a compelling play for investors who want exposure to the "AI revolution" through a company that has already proven it can turn AI into real-world profits. It avoids the volatility of pure-play tech startups by leaning on its long-term, annuity-like contracts with Fortune 500 companies.

What to Watch in the Near Term: 📈

• India’s New Labor Codes: Monitor how these regulatory changes impact operating margins in the second half of 2026.
• AI Monetization: Watch for updates on the adoption of the new NVIDIA-powered agentic AI suite; higher adoption here will lead to margin expansion.
• Share Buybacks: The execution of the $500 million buyback program should provide a solid floor for the stock price throughout the year.

Recommendation:

ExlService (EXLS) is a high-conviction "Buy" for 2026. It combines double-digit growth with a disciplined capital allocation strategy and a valuation that hasn't yet caught up to its AI-driven potential.

EPAM Systems (NYSE: EPAM)

EPAM Systems (NYSE: EPAM) is a premier global provider of digital platform engineering and software development services. Originally known for its deep roots in Eastern Europe, the company has successfully evolved into a global "AI-native" powerhouse, helping the world’s most complex enterprises navigate the shift from traditional software to AI-driven ecosystems.

Business Model and Revenue Streams 📦

EPAM’s business model is built on "Engineering DNA"—a reputation for solving the most difficult technical challenges that off-the-shelf software cannot handle. Unlike traditional IT outsourcers that focus on maintenance, EPAM is a "builder," earning the majority of its revenue through high-value, custom software engineering and digital transformation consulting. The company's revenue is diversified across several key industry verticals:

• Financial Services: This is EPAM's largest and strongest segment, representing roughly 24% of total revenue and growing at a robust 19.8% year-over-year as banks race to modernize their data foundations for AI.
• Software & Hi-Tech: Accounting for 15% of revenue, this segment grew by 18.1% recently, driven by tech companies needing specialized engineering talent to build new AI products.
• Consumer Goods, Retail & Travel: Representing nearly 20% of revenue, this vertical has seen steady 10.9% growth as retailers integrate generative AI into customer experiences.
• AI-Native Services: A critical new revenue stream, EPAM has set an ambitious target of $600 million in AI-native revenue for 2026. This excludes simple AI-assisted coding and focuses on building core AI platforms and enterprise-wide transformations for clients.

Macroeconomic policies, particularly geopolitical stability and global labor laws, are central to EPAM’s story. After shifting its delivery footprint away from Russia and Belarus, EPAM now operates heavily in India and Latin America. New labor regulations and wage inflation in these regions directly impact its cost of delivery. Additionally, U.S. trade and tariff policies have created headwinds for some of its newer acquisitions, such as NEORIS, which has significant exposure to the Mexican market.

Recent Performance and Corporate Developments 📈

EPAM delivered a strong "beat" in its latest quarterly report, though its conservative outlook for the rest of 2026 caused some initial market jitters.

Q4 2025 Financial Highlights: 💰

• Total Revenue: EPAM reported $1.41 billion for the quarter, a 12.8% increase year-over-year, beating analyst expectations.
• Earnings Per Share (EPS): Non-GAAP diluted EPS was $3.26, significantly higher than the $2.91 predicted by Wall Street.
• Full-Year Growth: For the total year 2025, revenue hit $5.46 billion, up 15.4% compared to 2024.
• Profitability: Non-GAAP operating margins remained healthy at 16.3%, showing the company's ability to maintain efficiency even while investing heavily in AI R&D.

Strategic Initiatives and Mergers: 🤝

The most significant recent development was the integration of NEORIS, a major IT consultancy that expanded EPAM's reach into Latin America and Europe. In March 2026, EPAM also announced a $300 million accelerated share repurchase agreement, a bold move intended to return value to shareholders following a dip in the stock price. Furthermore, the company expanded its "Empathy Lab" in North America, a specialized AI-native agency designed to help Chief Marketing Officers (CMOs) use AI to drive business growth.

Profitability and Fair Value 🎯

EPAM is highly profitable, with a clear focus on shifting toward "outcome-based pricing." By using its own AI tools to speed up development, EPAM can maintain high margins even if clients demand lower overall project costs. The company expects a non-GAAP operating margin of 15% to 16% for the full year of 2026.

In terms of fair value, EPAM is currently seen as a "coiled spring." While the stock has faced pressure due to a cautious 2026 revenue guidance (projecting 4.5% to 7.5% growth), many valuation models suggest it is deeply oversold.

• Intrinsic Value: Discounted Cash Flow (DCF) analyses peg EPAM’s fair value at approximately $261 per share.
• Market Price: Trading currently around $135–$137, the stock is at a 35% to 45% discount to its estimated fair value, offering a significant margin of safety for long-term investors.

Analyst Estimates and Ratings 📊

Consensus Rating: The consensus remains a "Moderate Buy." While some firms like Citigroup have moved to a "Neutral" stance due to short-term growth concerns, the majority of Wall Street (11 out of 18 analysts) maintains a "Buy" or "Outperform" rating.

Price Target: The average 12-month price target is $196.06, representing a potential upside of over 45% from current levels. Top-tier firms like Goldman Sachs and Mizuho have set even higher targets, ranging from $200 to $235.

Investor-Focused Takeaway: Is EPAM Right for Your Portfolio?

EPAM is currently a classic "value-growth" play. The market has punished the stock for its conservative 2026 guidance, but the underlying engineering expertise and the pivot to a $600 million AI-native revenue target suggest the company is preparing for its next major growth leg.

What to Watch in the Near Term: 📈

• AI Pivot Execution: Success in hitting the $600 million AI revenue goal will be the primary catalyst for a stock re-rating.
• NEORIS Stabilization: Watch for the stabilization of revenue from NEORIS’s largest clients, which have been a drag on recent organic growth.
• Buyback Impact: The execution of the $300 million share repurchase program should support the stock price and boost EPS in the coming quarters.

Recommendation:

EPAM Systems (EPAM) is an excellent pick for investors with a 12-to-18-month horizon. While the "macro-fog" persists, the company’s strong balance sheet, massive share buybacks, and deep AI integration make it one of the highest-quality IT stocks currently trading at "clearance" prices.

Final Take: The Data Intelligence and Engineering Backbone of AI

The AI revolution has moved from the laboratory to the boardroom. For global enterprises, success now depends on two distinct capabilities: turning raw data into automated decisions and building the complex custom architecture that allows those decisions to scale.

This is where ExlService (EXLS) and EPAM Systems (EPAM) stand apart as the quiet architects of the AI economy.

🤖 ExlService (EXLS) — The Data Brain of the AI Enterprise

• ✔ AI-First Operations: Over 57% of revenue is now driven by data-led services, moving beyond traditional outsourcing.
• ✔ Vertical Dominance: Deeply embedded in high-barrier sectors like Insurance and Healthcare where precision is non-negotiable.
• ✔ Strong Capital Returns: Massive $500 million buyback program signals deep management confidence in 2026.
• ➤ Best for: Investors seeking a high-moat, high-margin "software-plus-service" compounder that is successfully monetizing AI in the world's most regulated industries.

⚙️ EPAM Systems (EPAM) — The Engineering Engine of AI Transformation

• ✔ Engineering DNA: The premier builder of custom, "AI-native" platforms that off-the-shelf software cannot replace.
• ✔ Massive Valuation Gap: Trading at a 35% to 45% discount to its intrinsic value, offering a rare entry point for a Tier-1 tech leader.
• ✔ Growth Catalyst: A targeted $600 million in AI-native revenue for 2026 represents a major pivot toward high-growth consulting.
• ➤ Best for: Value-oriented investors looking for a high-quality "coiled spring" that provides foundational exposure to the global digital transformation cycle.

Investor Insight

• 🧩 Want AI-led operational efficiency with high recurring revenue? → EXLS
• 🛠️ Want world-class engineering expertise at a deep valuation discount? → EPAM

Bottom Line:

Artificial intelligence doesn’t scale on models alone—it scales on domain-specific data and expert software engineering.

ExlService provides the intelligence that runs the back office, while EPAM provides the engineering power that builds the front end. As enterprise AI spending shifts from "pilots" to "production," EXLS and EPAM aren't just IT vendors—they are the foundational partners of the next decade.

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Happy Trading
​— Team Premium Stock Alerts