Company Reports

We are maintaining our $94 fair value estimate for narrow-moat Cognizant after the firm kicked off fiscal 2024 with a set of 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 marked 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 afterhours, we continue to view Cognizant as materially undervalued and trading in the 5-star territory.

We are maintaining our $94 fair value estimate for Cognizant after the firm reported strong financial results to close out fiscal 2023. The upward impact of these results on our fair value estimate was offset by the weaker-than-expected guidance for fiscal 2024. All considered, we continue to view Cognizant as materially undervalued and think that the market is allowing near-term discretionary weakness to factor into longer-term discretionary spending expectations. We expect discretionary spending to rebound as macroeconomic weakness dissipates, which we believe will enable Cognizant to rejuvenate its top-line growth.

Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don't see Cognizant returning to that level of growth in the future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.

Cognizant’s results were right in line with our top- and bottom-line expectations in the third quarter. Our expectations, however, were baking in significant discretionary weakness from cut customer budgets—and such softness was realized though large deal activity softened the blow. We think the market is allowing near-term discretionary weakness to factor into longer-term discretionary spending expectations, which we think is too conservative in the wake of hefty demand for digital transformation projects which we see as rebounding after this time of macroeconomic weakness. While the firm narrowed the range for full-year revenue and EPS within their past ranges, we think this is a reasonable adjustment as the firm has one more quarter under its belt. All considered, we are maintaining our fair value estimate for narrow-moat Cognizant at $94 per share. Shares have remained flat upon results, leaving Cognizant significantly undervalued, in our view. Altogether, we continue to view the stock as a top pick under our technology coverage as we are encouraged by their reversal of course compared with historical bumps in the road. We think this inflection is reflected in its net promoter score at all-time levels.

Narrow-moat Cognizant reported second-quarter results in line with our expectations, continuing the strong performance we witnessed in the previous quarter. We are encouraged to see clients’ embrace of Cognizant’s Neuro AI offerings that recorded over 100 active engagements, highlighting the firm’s strong technical knowledge in artificial intelligence. Trailing 12-month bookings also grew 17% year over year to $26.4 billion, the highest level in five quarters. Taking into account the long-term top-line potential as a result of the robust pipeline, we are raising our fair value estimate to $94 per share. Shares increased 8% following the announcement, but still trading significantly undervalued, in our view.

Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don't see Cognizant returning to that level of growth in the near future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.

Cognizant is one of our top picks in the technology sector, as we see an attractive long-term investment opportunity in the narrow-moat firm implied in our $91 fair value estimate and our 5-star rating. We believe the market is significantly discounting Cognizant’s potential, penalizing the firm for past execution and strategic mistakes, which we believe are in the rearview mirror.

Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don't see Cognizant returning to that level of growth in the near future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.

Cognizant posted solid results for the first quarter of the year, surpassing our top- and bottom-line expectations. Guidance for the year was a more mixed story. While we thought revenue was underwhelming, profitability appears to be better than we were bracing for. Accounting for the blended guide, we are maintaining our fair value estimate of $91 per share as we believe that there is no reason for Cognizant not to benefit from long-term digital transformation trends to a similar degree as its peers. Shares are up 5% upon results, but the stock still has a long way to go to reach our fair value estimate, in our view, leaving plenty of opportunity for investors to invest in this narrow-moat stock.

Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don't see Cognizant returning to that level of growth in the near future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.

Cognizant posted a mixed fourth quarter—beating our top-line forecast while missing on the bottom line. Management’s guidance for the quarter ahead is weak out of caution, especially within the firm’s financial services division. In addition, Cognizant refrained from providing an outlook for the full year. Despite management’s conservatism, we are maintaining our $91 fair value estimate for Cognizant shares. While the company has headwinds in the near term as firms delay their still much desired digital transformations, we are confident that Cognizant can benefit from the hefty digitization market in the long term. We continue to believe that Cognizant is one of the most attractive IT services stocks under our coverage. We think most of Cognizant’s peers are fairly valued and Cognizant is being overly penalized for mistakes in its past despite its current solid moat. In addition, we think Cognizant will be reinvigorated by Ravi Kumar’s new appointment to CEO.

Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don't see Cognizant returning to that level of growth in the near future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.

On Jan. 12, Cognizant announced that former Infosys president Ravi Kumar has been appointed to CEO of narrow-moat Cognizant, effective immediately. The company also released mixed high-level results for the fourth quarter, featuring better-than-expected revenue. Kumar is replacing Brian Humphries, who has been CEO of the firm since 2019. Humphries will act as a special advisor to Cognizant until March to streamline the transition. We expect the transition will be aided by the fact that Kumar has already begun his orientation with Cognizant. On Oct. 17, 2022, Kumar was appointed president of Cognizant Americas, which sparked early rumors of Kumar eventually becoming CEO. Now with Kumar in the CEO role, 24-year Cognizant veteran Surya Gummadi will take the position of president of Cognizant Americas.

Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don't see Cognizant returning to that level of growth in the near future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.

Cognizant recorded a disappointing third quarter, with results below our expectations and management’s, as Cognizant’s available headcount fell short of what it desired after heightened attrition and Visa travel restrictions served as a headwind. In addition, Cognizant lowered its full-year guidance, expecting greater currency impact than previously forecast. We are decreasing our fair value estimate for narrow-moat Cognizant to $91 per share from $96 per share upon results. Despite our fair value cut, we continue to believe Cognizant’s revenue five-year revenue CAGR will outpace the last five years, though at a more moderate level than we previously expected. We think Cognizant will be able to achieve a revenue CAGR of 7% over the next five years compared to 5% over the last five years. We continue to stay confident in such general acceleration due to the overall demand for all things digital transformation—even if it means Cognizant not being able to fulfill all of this demand in the short term as it finds its bearings, as it tries to strike balance in an essential driver of revenue: its headcount. Shares are down 6% to near $57 per share after hours, leaving the stock in five-star territory.

Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don't see Cognizant returning to that level of growth in the near future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.

Cognizant proved this quarter that it is more aggressively attacking margin headwinds than its IT services peers—boasting operating margin expansion the quarter, a stark contrast to its peers who have experienced difficult margin contraction. Nonetheless, Cognizant's margin boosting levers are moderating revenue growth, as second-quarter top-line results came in at the lower end of management's guidance. While we agree with Cognizant that striking a balance between margin expansion and revenue growth is important, we think there is something to be said about the importance of customer acquisition—as stickiness of IT services should lead to nice customer lifetime value.

Cognizant kicked off the year with decent first-quarter results ahead of FactSet consensus on the top line, however, bottom-line results came in short of expectations. Despite persistent challenges arising from talent shortages within the IT services industry, we remain impressed with Cognizant’s ability to expand its top line and shrink voluntary attrition rates over the quarter. While management has provided a conservative outlook for 2022, we believe elevated demand for Cognizant’s digital transformation services will continue to drive growth and offset the near-term headwinds. Furthermore, Cognizant’s acceleration of international revenue and bookings growth is promising. With this, we maintain our fair value estimate for narrow-moat Cognizant at $102 per share and view the stock as attractive.

Cognizant is one of the leading IT services providers in the world and was known as a growth darling for its revenue growth of 20%-40% during 2010-15. While we don't see Cognizant returning to that level of growth in the near future, reacceleration in growth is not farfetched. We think Cognizant can deliver this via thoughtful investment in enhancing technical capabilities, more robust strategy consulting operations, and a more diversified client base. With such a focus, we think Cognizant has the potential to strengthen its already moaty business, which benefits from significant switching costs and intangible assets based in its technical expertise.

With the IT services industry, two major forces have been battling--with digital transformation demand a major tailwind, and a dire talent shortage serving as a significant headwind. Despite these conflicts, Cognizant posted a decent fourth quarter with top line results coming in right around FactSet consensus and our estimates, while non-GAAP earnings per share was 6% higher than FactSet consensus and 3% higher than our original forecasts. While guidance for 2022 was lower than we were expecting, likely leading to shares down 2% upon results, it still represents healthy growth and margin expansion on an absolute basis. Significant unmet demand as a result of talent constraints in the industry has us boosting our forecasts for 2023 through 2026--as we think digital transformation work will continue to remain elevated over the next five years. Furthermore, Cognizant's acceleration of international revenue is promising. Our top line improvements to outer years in our model, combined with our model roll, has us raising our fair value estimate for narrow-moat Cognizant to $102 per share from $95 per share and we view the narrow-moat stock as attractively priced as the stock trades at $86 after hours.