Cognizant Earnings: Improved Profitability Buttresses Results as Customer Spending Remains Muted

Key Morningstar Metrics for Cognizant Technology Solutions

• Fair Value Estimate: $94.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Cognizant Technology Solutions’ Earnings

We maintain our fair value estimate of $94 per share for Cognizant Technology Solutions CTSH after the firm kicked off fiscal 2024 with strong financial results, marked by impressive profitability despite the tough macro conditions. Over the last few quarters, Cognizant and its IT services peers have seen a slowdown in discretionary customer spending amid a generally tight macro environment. Investors have homed in on this near-term weakness, dealing overly punitive damage to Cognizant’s valuation. With an eye on the long term, we continue to view Cognizant as a moaty IT service vendor with a strong growth and margin profile. Despite shares trading up after hours, we continue to view Cognizant as materially undervalued and trading in 5-star territory.

Cognizant’s sales for the first quarter clocked in at $4.8 billion, down 1% year over year. Short-duration engagements, typically discretionary, continued to see weakness. While we expect this near-term weakness to continue in 2024, we are modeling a return to growth in 2025 as customer spending on IT services returns as macro conditions gradually improve. We continue to be impressed by Cognizant’s focus on profitability during this period of macro uncertainty. The firm’s adjusted margins maintained their upward trajectory, finishing the quarter at 15.1%, up 50 basis points year over year.

Cognizant’s guidance sees full-year revenue of $18.9 billion-$19.7 billion, implying flat year-over-year growth. Management expects full-year margins to be 15.4% and adjusted EPS to be $4.59, at the midpoint of the guidance ranges. We see a healthy dose of conservatism splashed in these targets, and we model marginal upside to these results and view improving macro conditions supporting growth/profitability toward the tail end of fiscal 2024.