Cognizant Earnings: Firm Focuses On Profitability as Top-Line Expansion Slows

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 are maintaining our $94 fair value estimate for Cognizant Technology Solutions CTSH after the firm reported strong results to close out fiscal 2023. The upward impact of these results was offset by the weaker-than-expected guidance for fiscal 2024. All things considered, we continue to view Cognizant as materially undervalued, and 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’s sales for the fourth quarter declined 2% year over year to $4.8 billion. Much like last quarter, shorter-duration engagements, which are more discretionary, saw continued weakness. We remind investors that weakness in discretionary spending is affecting the IT services industry. As mentioned above, we expect these headwinds to subside as the macroeconomic conditions normalize. Cognizant’s fourth-quarter adjusted margins came in at 16.1%, up 190 basis points year over year, underscoring the firm’s continued emphasis on profitability during a time when clients are slowing their discretionary spending on IT services.

We see a healthy dose of conservatism in the firm’s financial targets, and we’re modeling Cognizant to provide upside to these targets as the year progresses. Management guided to full-year 2024 revenue of $19.0 billion-$19.8 billion, implying flat year-over-year growth. On the profitability side, management expects full-year margins to be 15.4% and adjusted earnings per share to be $4.59, both at the midpoint of the guidance ranges.