AI Advancements And Global Alliances Will Strengthen Market Position

Key Takeaways

• Strategic AI advancements and partnerships enhance client offerings, driving potential revenue and market share growth.
  
• Global alliances and strategic acquisitions expand market reach, supporting revenue growth and diversification opportunities.
  
• Increasing competition and reliance on acquisitions could pressure Cognizant's revenue growth, while macroeconomic and regulatory changes may impact earnings stability.

Catalysts

A professional services company, provides consulting and technology, and outsourcing services in North America, Europe, and internationally.

• Significant advancements in AI capabilities, such as the introduction of new AI platforms and strategic partnerships, suggest that Cognizant can further drive innovation and enhance client offerings, potentially leading to increased revenue and market share.
  
• The expansion of Cognizant's global alliances ecosystem, along with strategic acquisitions like Thirdera and Belcan, positions the company to tap into new markets and industries, potentially supporting revenue growth and diversification.
  
• The completion of the NextGen cost optimization program indicates improved operational efficiency and enhanced margins, with potential for further margin expansion as AI adoption increases productivity and reduces costs across Cognizant's services.
  
• The company's growing expertise and active role in setting up Global Capability Centers for clients suggest a strategic avenue to capture more of the operations budgets of enterprises, rather than just IT budgets, expanding revenue opportunities.
  
• Expected improvements in discretionary spending, coupled with a strong pipeline and increasing large deal signings, indicate potential boosts to revenue growth, especially as financial services and other sectors increase their technology investments.

Cognizant Technology Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cognizant Technology Solutions's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.3% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $2.8 billion (and earnings per share of $5.81) by about March 2028, up from $2.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.8x on those 2028 earnings, up from 18.4x today. This future PE is lower than the current PE for the US IT industry at 43.7x.
• Analysts expect the number of shares outstanding to decline by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Cognizant Technology Solutions Future Earnings Per Share Growth

Risks

• Increasing competition to deliver AI solutions and services may pressure Cognizant's revenue growth if rivals develop similar or superior offerings.
  
• Comprehensive investments in building and deploying AI infrastructure and automation initiatives could impact future net margins if these investments do not yield expected efficiencies or market adoption.
  
• Cognizant's major growth markets, such as Health Sciences and Financial Services, are vulnerable to macroeconomic fluctuations that could reduce client discretionary spending, affecting revenue projections.
  
• The ambitious reliance on acquisitions like Belcan and Thirdera for revenue growth introduces integration risks and might not achieve the projected synergies, thus impacting earnings stability.
  
• The political and regulatory changes, particularly concerning offshoring and outsourcing policies in key markets like the U.S. and Europe, can increase operational costs or impact client engagement, which may affect overall revenue growth.

Valuation

• The analysts have a consensus price target of $87.57 for Cognizant Technology Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $103.0, and the most bearish reporting a price target of just $68.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $23.3 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 18.8x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $83.23, the analyst price target of $87.57 is 5.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.