Executive Summary / Key Takeaways

• AI-First Transformation as Growth Engine: Grid Dynamics has pivoted from traditional digital transformation services to an AI-native engineering model, with AI initiatives contributing over 25% of organic revenue in Q3 2025 and growing nearly three times faster than the overall business, creating a powerful flywheel effect that is reshaping client engagement and expanding addressable market.

• Margin Repair Opportunity: Management has launched a company-wide initiative to expand margins by at least 300 basis points over the next 12 months through efficiency improvements, AI-enhanced pricing, and geographic rebalancing, targeting structural improvements that could transform profitability even without favorable macro conditions.

• Vertical Diversification Reduces Legacy Dependency: The Finance vertical has surged to 24.6% of revenue (80% YoY growth), while Technology, Media & Telecom reached 27.4%, collectively offsetting Retail's decline and reducing concentration risk from the company's historically retail-heavy client base.

• Fortress Balance Sheet Enables Strategic Optionality: With $338.6 million in cash, no debt, and a recent $107.6 million follow-on offering, Grid Dynamics possesses the financial firepower to pursue accretive acquisitions, fund AI R&D, and weather macro uncertainties while competitors face capital constraints.

• Execution Risk on Margin Expansion: The 300 basis point margin target faces headwinds from FX volatility (51.8% of costs in non-USD currencies), elevated cost structures in key delivery locations, and intense competition for senior AI engineering talent, making operational execution the critical variable for thesis validation.

Setting the Scene: From Digital Consultant to AI-Native Engineering Partner

Grid Dynamics Holdings, Inc., founded in 2006 and headquartered in San Ramon, California, has spent nearly two decades building a technology consulting and platform engineering business that today stands at an inflection point. The company generates revenue by helping enterprises become more agile through cloud platform engineering, data and machine learning platforms, and advanced analytics services. What began as a traditional digital transformation consultancy has evolved into an AI-native engineering partner, a shift that explains both its recent growth acceleration and its margin expansion opportunity.

The IT services industry in which Grid Dynamics operates is brutally competitive, dominated by global giants like EPAM Systems with $1.4 billion quarterly revenue and deep engineering benches, Globant with its design-led innovation model, Endava leveraging Eastern European cost advantages, and CI&T with its Latin American delivery footprint. Grid Dynamics occupies a distinct niche: a mid-tier specialist focused on AI and analytics-driven transformation for Fortune 1000 companies. This positioning creates a dual-edged sword—smaller scale limits bargaining power in multi-region deals, but specialized focus enables faster time-to-market for data-heavy projects compared to the broader, more bureaucratic offerings of larger competitors.

The company's history provides crucial context for its current strategy. Grid Dynamics wrote what management calls "the first book about AI" in 2017 and has been building advanced analytics and machine learning solutions since that year, accumulating what they term "over eight years of leadership in enterprise artificial intelligence." This early commitment created a foundation of accelerators, blueprints, and proven methodologies that positioned the company perfectly when the AI boom began. While competitors were scrambling to build AI capabilities from scratch, Grid Dynamics had business cases and implementation experience ready to deploy.

Geographic expansion has been a deliberate strategic pillar. Over three years, the company grew from operating in a few countries to 19 across North America, Europe, and India. India emerged as a top-three delivery location within three years, becoming a hub for multi-agent, multi-modal platform engineering. This Follow-the-Sun delivery model , recently bolstered by the Argentina-based Mobile Computing acquisition, provides 24-hour development cycles and cost optimization opportunities that pure-play regional competitors cannot match.

Technology, Products, and Strategic Differentiation: The GAIN Advantage

Grid Dynamics' competitive moat centers on its proprietary "Grid Dynamics AI-Native" (GAIN) engagement model and a technology vision structured across three horizons: AI-first delivery, Agentic AI at scale, and Physical AI . This isn't marketing jargon—it represents a fundamental rethinking of how software engineering services are delivered and priced.

The AI-first delivery horizon transforms the Software Development Life Cycle (SDLC) by operationalizing AI in core processes. Management notes that AI adoption in SDLC has "exploded," enabling the company to take on labor-intensive legacy modernization projects that were previously economically inaccessible. The ability to create full-fledged proof of concepts in hours instead of weeks provides a game-changing advantage, improving conversion rates and accelerating sales cycles. This matters because it directly addresses the biggest friction point in enterprise software sales: the long, expensive pilot phase. By collapsing this timeline, Grid Dynamics can win deals faster and with lower presales costs than EPAM Systems or Globant , whose larger scale often translates to slower decision-making.

Agentic AI at scale focuses on deploying autonomous AI platforms for customers and employees. The company is partnering with large enterprises to build bespoke Agentic platforms, creating significant expansion opportunities. For example, Grid Dynamics developed a system for a leading specialty retailer that coaches sales associates through AI-powered role-playing, and created an Agentic AI platform for a beverage company to automate enterprise operations. These engagements serve as critical entry points that open doors for larger, high-value platform modernization programs—a familiar pattern where initial AI engagements in search or personalization expand into broader data platform and cloud modernization work.

Physical AI represents the third horizon, integrating AI with the physical world through digital twins, collaborative robotics, and edge computing. The company is advancing this initiative through partnerships with robotics platform providers and its SmartRay software for robotic weld inspection. This positions Grid Dynamics at the intersection of AI and industrial automation, a market where traditional IT services firms like Endava and CI&T lack deep expertise, and where industrial automation companies lack software engineering sophistication.

The GAIN framework rethinks team composition, engineering workflows, and best practices to maximize AI productivity impact. Management explicitly states it brings "substantially higher efficiency gains than just utilizing stand-alone tools." This engineering-led approach, backed by eight years of ML/AI development experience, creates differentiation that transcends price competition. When customers expect AI flavoring across all service offerings, Grid Dynamics' senior-heavy workforce pyramid—weighted toward experienced engineers rather than junior coders—positions it uniquely. This talent structure supports higher bill rates and margins than the offshore-heavy models of Endava or CI&T , while providing the technical depth that Globant 's design-focused approach lacks.

Financial Performance & Segment Dynamics: Evidence of Strategic Shift

Grid Dynamics' Q3 2025 results provide compelling evidence that the AI-first strategy is working. Revenue reached $104.2 million, up 19.1% year-over-year, with AI contributing over 25% of organic revenue and growing nearly three times faster than the general business. This growth rate, while solid, masks a more important story: the dramatic shift in vertical mix that is fundamentally altering the company's risk profile and earnings power.

The Finance vertical has become a standout performer, growing 80.3% year-over-year to $25.6 million and representing 24.6% of total revenue. For the first time in company history, three of the top 10 customers in Q1 2025 were financial institutions. This transformation was catalyzed by the September 2024 acquisition of JUXT, a UK-based group of companies for $47 million, which significantly elevated industry expertise in banking and financial services and attracted interest from global banks. The strategic implication is profound: financial services clients typically sign longer-term, higher-value contracts with better margins than retail clients, and they are earlier adopters of AI for risk management, fraud detection, and algorithmic trading. This vertical shift supports both revenue growth and margin expansion.

Technology, Media & Telecom (TMT) surpassed Finance to become the second-largest vertical at 27.4% of revenue, growing 18.2% year-over-year. This growth is driven by higher demand from the largest technology customers, who are themselves racing to integrate AI into their products. For Grid Dynamics, serving tech giants creates a virtuous cycle: these clients demand cutting-edge AI capabilities, forcing the company to stay at the forefront of innovation, which then becomes a selling point for other verticals.

Meanwhile, Retail—the company's historical anchor—declined 2.9% year-over-year to 27.8% of revenue. While this reflects lower activity from some large customers, management notes that year-to-date growth remains positive at 10.8%, driven by specialty retail and new engagements. The key insight is that Retail is no longer the growth driver, but it remains a stable cash-generating vertical that funds investment in higher-growth sectors. This diversification reduces the single-vertical risk that plagued the company in prior years.

Gross margin pressure in Q3 2025 (33.3% vs. 37.4% prior year) reflects higher cost structures across key delivery locations and adverse foreign exchange impacts. Approximately 51.8% of combined cost of revenues and operating expenses were denominated in non-USD currencies, up from 43% in the prior year. This FX exposure is a material risk—a 10% strengthening of the Polish zloty against the dollar would decrease operating income by $2.1 million quarterly. However, management's 300 basis point margin improvement initiative directly addresses this through geographic rebalancing toward higher-margin locations and AI-enhanced pricing power.

The balance sheet provides crucial strategic flexibility. With $338.6 million in cash and no debt as of September 30, 2025, Grid Dynamics can invest through cycles while competitors face capital constraints. The November 2024 follow-on offering raised $107.6 million, and a new $50 million share repurchase program signals management's belief that the stock is undervalued.

Net cash provided by operating activities increased to $30.7 million for the nine months ended September 30, 2025, up from $23.1 million in the prior year, demonstrating improving cash conversion despite margin headwinds.

Outlook, Management Guidance, and Execution Risk

Management's guidance for Q4 2025 revenue of $105-107 million implies continued 17-19% growth, with full-year 2025 revenue expected between $410.7-412.7 million (17.1-17.7% growth). This outlook is underpinned by several key assumptions that investors must evaluate critically.

First, management expects the demand environment to remain stable but is not assuming macro improvement. As CEO Leonard Livschitz stated, "we're not assuming anything much on the macro, not a big positive, not a big help." This conservative posture is prudent given ongoing caution in traditional digital transformation spending, but it means any macro deterioration could pressure the top line.

Second, the 300 basis point margin expansion target relies on four pillars: efficiency improvements in higher-margin geographies, enhanced pricing with AI offerings, rebalancing lower-margin business, and AI-first productivity initiatives. This is achievable but faces headwinds. FX volatility remains uncontrollable, and competition for senior AI talent is intensifying. EPAM Systems and Globant are also investing heavily in AI capabilities, potentially creating wage inflation that offsets geographic rebalancing benefits.

Third, management highlights that new programs are "multi-quarter in nature" with budgets extending into 2026, and several top-10 clients have designated Grid Dynamics as a preferred vendor. This provides revenue visibility but also creates customer concentration risk—one client accounted for over 10% of revenue in both Q3 2025 and the prior year. The company's strategy to rationalize non-strategic customers reduced the total client count from 229 to 186 year-over-year, which improves average revenue per customer but increases dependency on remaining accounts.

The AI flywheel's durability is the critical swing factor. Management notes that AI projects serve as entry points for larger platform modernization programs, with initial engagements in search or personalization expanding into broader data and cloud work. This pattern is encouraging but requires consistent execution. If AI projects fail to deliver ROI or if competitors develop comparable rapid-prototyping capabilities, the conversion funnel could break.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to the investment thesis is execution failure on the margin expansion initiative. While 300 basis points of improvement is achievable through self-help measures, it requires flawless operational execution in an environment of FX headwinds and wage inflation. A 10% strengthening of the Polish zloty or Indian rupee could wipe out half the targeted gains, while competition from EPAM Systems and Globant for senior AI engineers could force compensation costs higher, compressing margins despite efficiency gains.

Customer concentration remains a persistent vulnerability. With one client representing over 10% of revenue and the top 10 clients comprising a significant portion of total sales, the loss of a major customer could create a revenue hole that takes quarters to fill. The company's strategy of rationalizing smaller accounts exacerbates this risk, though it improves overall profitability.

Geopolitical exposure in Eastern Europe and India creates operational risk. The company explicitly warns that continued unrest or expansion of hostilities in Ukraine, Armenia, Serbia, or elsewhere could disrupt service delivery and impair financial transactions. While Grid Dynamics has successfully shifted work from affected regions, further escalation could force more expensive relocations, pressuring margins.

The competitive landscape is intensifying. EPAM Systems 's larger scale enables more robust R&D investment, potentially leapfrogging Grid Dynamics' AI capabilities. Globant 's design-led approach attracts premium clients who value user experience over pure engineering speed. Endava 's cost-competitive Eastern European model and CI&T 's Latin American footprint create pricing pressure in overlapping verticals. If AI capabilities become commoditized faster than expected, Grid Dynamics could face margin compression from pricing wars.

On the positive side, meaningful asymmetry exists if the AI-native strategy accelerates beyond expectations. If the GAIN model delivers productivity gains that enable the company to capture share in the massive legacy modernization market—projects previously considered economically infeasible—revenue growth could re-accelerate into the mid-20% range. The strong balance sheet also provides optionality for a transformative acquisition that could catapult the company into EPAM Systems 's scale tier.

Valuation Context: Reasonable Multiple for AI-Enabled Growth

At $9.77 per share, Grid Dynamics trades at 2.04 times trailing twelve-month sales and 1.24 times enterprise value to revenue. This valuation sits in the middle of its competitive set: EPAM Systems commands 2.22 times sales reflecting its larger scale and platform breadth, Globant (GLOB) trades at 1.20 times sales despite slower growth, Endava trades at a distressed 0.35 times sales amid revenue declines, and CI&T trades at 1.27 times sales with similar growth but higher leverage.

The price-to-free-cash-flow ratio of 45.02 appears elevated but must be contextualized. Grid Dynamics generated $18.4 million in free cash flow over the trailing twelve months while investing heavily in AI capabilities and geographic expansion. The company's net cash position of $338.6 million represents 41% of its $828.5 million market capitalization, providing a substantial valuation cushion. This cash war chest, combined with no debt and an undrawn $30-50 million credit facility, means the enterprise value of $503.6 million is actually lower than the company's ability to fund operations and growth.

Profitability metrics show a company in transition. The 35.29% gross margin reflects the impact of FX headwinds and geographic cost pressures, while the 0.68% operating margin includes heavy investment in AI R&D. However, the 3.42% profit margin and 2.96% return on equity demonstrate underlying profitability that should expand significantly if management delivers on its 300 basis point target. EPAM Systems (EPAM)'s 10.68% operating margin and 10.21% ROE provide a glimpse of the margin structure Grid Dynamics could achieve at scale.

The valuation multiple appropriately reflects both the AI growth story and execution risk. Investors are paying a modest premium to slower-growing peers but receiving exposure to AI initiatives growing at 3x the base business rate. The key question is whether management can convert this AI momentum into expanded margins while maintaining growth. If successful, the current multiple will appear attractive in hindsight; if execution falters, the strong balance sheet provides downside protection that Endava (DAVA) and CI&T (CINT) lack.

Conclusion: AI-Native Transformation at an Inflection Point

Grid Dynamics stands at the intersection of two powerful trends: the enterprise shift from experimental AI to production-scale implementations, and the IT services industry's need to evolve beyond labor arbitrage toward AI-enabled productivity. The company's eight-year head start in AI engineering, combined with its GAIN engagement model, creates a differentiated value proposition that is already driving vertical diversification and client expansion.

The central investment thesis hinges on management's ability to execute the 300 basis point margin expansion while maintaining the AI flywheel's momentum. Success would transform Grid Dynamics from a solid but unremarkable mid-tier consultancy into a high-margin, AI-native engineering platform with durable competitive advantages. The strong balance sheet provides both the resources and the strategic patience to navigate near-term headwinds while building long-term value.

For investors, the critical variables to monitor are margin progression quarter-over-quarter, AI's contribution to organic growth, and the pace of vertical diversification away from retail. If these metrics trend positively, the current valuation will prove conservative. If execution stumbles, the cash-rich balance sheet limits downside, but the premium multiple could compress. The story is no longer about digital transformation—it's about AI-native engineering at scale, and Grid Dynamics is better positioned than its valuation suggests.