Cognizant Earnings: Financial Services Show Resilient Growth; Project Leap Leads AI Efficiency Gains

Key Morningstar Metrics for Cognizant Technology Solutions

• Fair Value Estimate
  : $84.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Cognizant Technology Solutions’ Earnings

Cognizant Technology Solutions’ CTSH third-quarter revenue grew 5% in constant currency, at the midpoint of its guidance. Adjusted operating margin improved by 30 basis points to 16.3%, reaching a four-year high. Management cut full-year growth guidance by 110 basis points at the top end, leading to a 6% selloff on Oct. 29.

Why it matters: Like other IT service firms, Cognizant is enjoying a prolonged tailwind in financial services, with its revenue growing double digits for three consecutive quarters. Trailing 12-month bookings also grew a healthy 4% to $28.7 billion, bringing the book/bill ratio to 1.3.

• Artificial intelligence-led efficiency gains allowed Cognizant’s revenue and adjusted operating income per associate to grow. We believe Project Leap is a catalyst to realize even more potential from internal AI development, which should lead to a 60-basis-point operating margin gain in 2027.

The bottom line: We maintain our $84 fair value estimate for narrow-moat Cognizant. Shares currently look undervalued. We think the market underappreciates Cognizant’s limited exposure to government and retail clients, which offers long-term protection across geopolitical volatility.

• Cognizant is ahead of its peers in terms of the AI transition, with over half of contracts now on a fixed-price model. Around 40% of the company’s business is benefiting from AI, and AI services are growing roughly 2-3 times faster than companywide organic growth.
• We expect Cognizant to realize the full $200 million savings potential from Project Leap, but we also trimmed our near-term revenue growth forecast to reflect higher uncertainties around discretionary enterprise IT spending, which can take months to recover.

Between the lines: Management said the Labor Department’s labor certification suspension will not affect its talent operations. In recent years, Cognizant expanded its US-based labor force to operate under the new norm, where offshore labor arbitrage becomes increasingly challenging.