Capgemini Earnings: Results Broadly In Line but Market Reacts Negatively to AI Investment

Narrow-moat Capgemini CAP reported first-half results that were within our expectations and on-track with company guidance. However, the stock was down nearly 7% intraday. European technology stocks are in the red today, but 7% is an outsize move. We think the market is reacting negatively to the company’s announcement to invest EUR 2 billion over the next three years in artificial intelligence, which may be seen as evidence that artificial intelligence is a threat to the industry. We don’t expect to make a material change to our forecast of EUR 210 fair value estimate. At current levels, the shares look undervalued.

Guidance for 2023 was confirmed at revenue growth of 4%-7% in constant currency, an operating margin of 13.0%-13.2% and organic free cash flow of around EUR 1.8 billion.

Revenue growth slowed in the second quarter to 5.2% at constant exchange rates, or 7.9% for the first half as expected because of more challenging macroeconomic conditions. Nevertheless, the operating margin increased 20 basis points to 12.4% for the first half as Capgemini’s revenue mix continues to shift toward higher-margin services for intelligent industry and digital transformation activities (cloud, data, and artificial intelligence). Bookings were up 4% and the book/bill ratio remained healthy at 1.05. The majority of the slowdown appears to be happening in North America, as revenue growth was flat in the second quarter there. North America is often seen as the bellwether for IT services, so the market may be concerned that growth will decline more than expected globally in the second half.

Capgemini announced its intention to invest EUR 2 billion in artificial intelligence over the next three years to develop a portfolio of industry-specific offerings. The company plans to double its employee base in data and artificial intelligence to 60,000 people during this time period.