AI And Cloud Initiatives Will Shape Future Opportunities And Risks

Key Takeaways

• Strong demand for digital modernization, AI, and cloud solutions is driving growth opportunities and improved deal flow for DXC.
  
• Operational efficiency, strategic partnerships, and a skilled workforce position DXC to enhance margins and capitalize on enterprise digital transformation trends.
  
• Ongoing revenue declines, competitive and operational headwinds, and uncertain turnaround efforts threaten DXC's long-term growth, margin stability, and overall market positioning.

Catalysts

Provides information technology services and solutions in the United States, the United Kingdom, the rest of Europe, Australia, and internationally.

• DXC's strong bookings momentum, with three consecutive quarters of double-digit growth and a sustained trailing 12-month book-to-bill ratio above 1.0, suggests improving deal flow linked to client demand for digital modernization, which should convert to organic revenue stabilization and growth over the next 12-18 months.
  
• The company's ability to attract high-profile technology leaders (including talent from Accenture) and invest in scaling next-generation AI capabilities and cloud migration positions DXC to capitalize on clients' accelerated shift toward AI-driven business processes, expanding addressable market and supporting both top-line growth and margin improvement.
  
• Deepening strategic partnerships with AI and cloud ecosystem players (such as Boomi, Microsoft, AWS, and Google Cloud) create opportunities to deliver value-added solutions for complex enterprise transformations, potentially lifting average deal size, win rates, and revenue growth in key segments.
  
• Continued operational efficiency initiatives-including broad-based internal application of AI, standardized delivery processes, and ongoing cost discipline-are expected to enhance margins and generate strong free cash flow, providing additional capital for reinvestment or shareholder returns.
  
• Recognition as a leader in enterprise-grade GenAI solutions and ongoing investments in workforce training (with 92% of technical teams AI-ready) should accelerate DXC's ability to win new business in regulated and complex industries, supporting higher renewal rates, improved profitability, and sustainable earnings growth.

DXC Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DXC Technology's revenue will decrease by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 3.0% today to 1.7% in 3 years time.
• Analysts expect earnings to reach $208.6 million (and earnings per share of $1.23) by about August 2028, down from $379.0 million 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 18.5x on those 2028 earnings, up from 6.6x today. This future PE is lower than the current PE for the US IT industry at 31.0x.
• Analysts expect the number of shares outstanding to decline by 1.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

DXC Technology Future Earnings Per Share Growth

Risks

• Ongoing organic revenue declines (-4.3% YoY this quarter, with management guiding for a further 3-5% organic decline for full-year fiscal 2026) highlight persistent challenges in stabilizing top-line performance, suggesting long-term risk to sustainable revenue growth.
  
• GIS (Global Infrastructure Services) segment, which accounts for over half of revenues, continues to decline at mid-single digits, reflecting underlying industry headwinds as enterprises shift to hyperscale cloud providers and increasingly insource IT, negatively impacting future revenue and competitive positioning.
  
• Despite strong bookings growth and improved book-to-bill ratios, the business remains exposed to customer hesitancy and deal deferrals, especially for large contracts, making sustained revenue conversion and backlog realization uncertain, which could impede both short-term and long-term earnings momentum.
  
• Competitive pressures from digital-native firms and hyperscalers in AI, cloud, and digital transformation, combined with DXC's heritage in legacy outsourcing, point to ongoing execution risk in repositioning the company and risking further margin compression or customer attrition, threatening long-term net margin and market share.
  
• Persistent investments and restructuring to drive operational efficiency have yet to halt margin declines (adjusted EBIT margin at 6.8% this quarter, down 10 bps YoY, and non-GAAP EPS down YoY); any failure to realize cost savings or offset wage inflation and talent shortages could constrain net margins and free cash flow in future years.

Valuation

• The analysts have a consensus price target of $15.75 for DXC Technology 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 $18.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.1 billion, earnings will come to $208.6 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 12.3%.
• Given the current share price of $13.89, the analyst price target of $15.75 is 11.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.