AI Expansion And Process Streamlining Will Boost Long-Term Competitive Edge

Key Takeaways

• Improved sales execution and AI expansion are aimed at long-term revenue growth and competitive advantage.
  
• Streamlining and cost management in infrastructure services are enhancing profitability and margins.
  
• Declining revenue and a low book-to-bill ratio indicate ongoing challenges, with potential pressure on future revenue and margins if not effectively addressed.

Catalysts

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

• DXC Technology is implementing several self-help initiatives, such as a revamped go-to-market approach and enhancements in sales execution, which are expected to drive better bookings and revenue growth in the long term.
  
• The company is expanding its AI offerings, including a Gen AI Center of Excellence, which is anticipated to sharpen its competitive edge and contribute to future revenue growth.
  
• The successful implementation of DXC Fast RISE with SAP services is expected to accelerate client digital transformations and boost DXC’s consulting and engineering services segment, impacting revenue positively.
  
• Streamlining processes and improving resource management across its Global Infrastructure Services segment is leading to improved margins, which is expected to enhance overall profitability.
  
• The reduction of low-margin deals in the GIS segment, along with disciplined cost management, is creating room for margin expansion and improving net earnings.

DXC Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DXC Technology's revenue will decrease by -2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 3.3% in 3 years time.
• Analysts expect earnings to reach $405.2 million (and earnings per share of $1.42) by about December 2027, up from $24.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.0x on those 2027 earnings, down from 160.7x today. This future PE is lower than the current PE for the US IT industry at 43.8x.
• Analysts expect the number of shares outstanding to grow by 16.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.6%, as per the Simply Wall St company report.

DXC Technology Future Earnings Per Share Growth

Risks

• Total revenue declined 5.6% year-over-year, indicating potential ongoing challenges in maintaining or growing revenue levels amidst market pressures.
  
• There are concerns regarding corporate spending on discretionary projects, suggesting potential pressure on future revenue and net margins if such trends persist.
  
• The book-to-bill ratio remains below 1, which indicates that the company is currently booking less new business than it is billing, potentially impacting future revenue streams.
  
• The decline in GIS revenue by 9.6% year-over-year, and challenges with low-margin deals, may continue to pressure overall revenue and EBIT margins if not addressed effectively.
  
• Resale revenue in both GIS and Modern Workplace has seen significant declines, which, while improving margins, can reduce overall revenue levels if not offset by growth in other higher-margin areas.

Valuation

• The analysts have a consensus price target of $22.1 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 $26.0, and the most bearish reporting a price target of just $18.98.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.4 billion, earnings will come to $405.2 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 10.6%.
• Given the current share price of $21.3, the analyst's price target of $22.1 is 3.6% 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.