Last Thursday, Teleperformance shares took a good slap in the face, like a foot on the skateboard from the 3rd floor landing. The share price fell from €130 to €95, before finally stabilising at around €110 in a volatile week. Yesterday the company published its results, which the market is moderately pleased with: the share price has fallen in a straight line to €85.

 

So what happened? Last Thursday, Klarna, a Swedish fintech, issued a press release saying that, thanks to AI, it had been able to replace 700 employees in its customer service business - Teleperformance's core business - thereby saving $40 million a year.

 

It was this press release that caused the Teleperformance share price to fall. We also note that Teleperformance's bond prices have fallen - not to the same extent of course, but this shows that the credit market, which is normally more measured in its judgements, is also worried. And US competitor Concentrix has followed the same path, so it's a lack of confidence that's affecting the whole sector.

 

The results published last night were as expected, both in terms of margins and growth forecasts for 2024. The company also made it into the FORTUNE ranking of the best companies for its working conditions, which shows that the scandal with Colombia - a major issue last year - is well and truly over.

 

There are four elements to be taken into account in this action today:

 

1/ The digestion of last year's acquisition of Majorel for €3.0bn, financed by debt, bringing total debt to over €4.0bn, a substantial figure.

 

2/ Post-COVID digestion. The company was awarded exceptional contracts by governments to manage the pandemic. These contracts are no longer in place, so the basis for comparison is high when assessing growth.

 

3/ The change of regime of its major clients (Apple, Barclays etc...): after the resounding example of Meta in 2023, which adopted the "Time To Get Fit" strategy, which basically boils down to massive cost cutting, all these major companies followed its example. As Teleperformance is a supplier to these companies, the commercial discussions have no doubt been less cheerful than in previous years.

4/ Finally, there is the threat of AI: if Klarna's example is true and it really is possible to replace thousands of employees with an algorithm, then Teleperformance's future looks bleak. Admittedly, the company itself is already using AI in its processes - with its partnership with Microsoft - but it will have to face up to new competitors.

 

On point 1, is this acquisition, which came just after competitor Concentrix bought Webhelp, an ego error or a strategic success? Management replies that it is point two - obviously - for the markets brought in by Majorel in France and Germany, as well as in the insurance sector, where Majorel is the leader.

 

We believe that points 2 and 3 are factual and cyclical.

 

Point 4 is more debatable: customer service specialists are rather dubious about Klarna's announcement (see attached article). And, as Mimoza reminded us, Klarna is preparing its IPO. In these markets, there's nothing like a little press release explaining your mastery of AI to boost your IPO price by X%. We've read a lot of fake news about this event. For example, Reuters, a source hitherto reputed to be reliable, wrote yesterday that Klarna was a competitor of Teleperformance. But this is not true.

 

Lastly, the market's violent reaction must not be due solely to a negative interpretation of fundamentals: we must also take into account the development of algorithms and structured products, which incorporate sell order mechanisms when certain levels are reached, thereby amplifying movements.

 

In terms of valuation, the share is currently trading at 8 times 2024 earnings. Capitalisation is now below €6bn for a company expected to generate €1bn in free cash flow in 2024. These are very low multiples.

 

The conclusion is that these valuation levels only make sense if Teleperformance is on its way, slowly but surely, to the cemetery. Our analysis is that this scenario exists, but that the probability assigned to it by the market is far too high. There are a majority of scenarios in which Teleperformance is correctly defending its share of the pie. And if that's the case, the multiple should be much higher. So our view is that, at this valuation level, the risk is upside. We are holding. If I take the image from the beginning, we've gone from the 3rd floor to the ground floor but now, at €86, we're squarely in the cellar: we shouldn't be able to go much lower.

 

Market and portfolio focus

Behaviour:

From 23/02 to 01/03, the fund lost 0.2% and the CAC 40 0.6%, while the S&P 500 gained 1.0%. The big story this week was, of course, Teleperformance. We lost 1.2% following Klarna's announcement.
Offsetting this, Tidewater, Vipshop and Dollar General each returned 0.4%, buoyed by the publication of good results.

Lines :

No movement on the fund this week.

 

Have a good weekend,

Charles