Cognizant’s Third Quarter Disappoints With Headcount Woes; Lowering FVE but Shares Still Undervalued

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.