AI Investments And SAP, ServiceNow Partnerships Will Drive Future Operational Efficiency

Key Takeaways

• DXC Technology's strategic investments in AI, partnerships, and talent are expected to drive revenue growth and improve operational efficiency over time.
  
• The company's disciplined execution and cost management initiatives are strengthening its margins, positioning it for future earnings growth.
  
• DXC Technology faces revenue challenges due to declining segments, global economic pressures, and reduced free cash flow despite temporary margin benefits from deferred spending.

Catalysts

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

• DXC Technology's revamped go-to-market approach is gaining traction, evidenced by a significant increase in bookings and a strong book-to-bill ratio of 1.3x, which is expected to positively impact future revenue growth.
  
• The company is investing in expanding its capabilities in consulting, engineering, and AI, including partnerships with SAP and ServiceNow to incorporate AI solutions into industry frameworks, which is anticipated to drive future revenue.
  
• DXC Technology is committed to driving innovation and improving service quality, as shown by the improvements in delivery metrics and Net Promoter Scores, which are expected to enhance client retention and growth, impacting future revenue and margins.
  
• The company has hired high-caliber talent, including a new CIO, to increase AI usage and advance its data strategy, which is expected to enhance operational efficiency and potentially improve net margins in the future.
  
• DXC Technology's focus on disciplined execution and the realization of cost management initiatives have led to an expansion in adjusted EBIT margins, providing a solid foundation for earnings growth as the company seeks to stabilize and grow top-line revenue.

DXC Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DXC Technology's revenue will decrease by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.6% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $445.0 million (and earnings per share of $1.72) by about March 2028, up from $-75.0 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 13.4x on those 2028 earnings, up from -41.9x today. This future PE is lower than the current PE for the US IT industry at 43.2x.
• Analysts expect the number of shares outstanding to grow by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

DXC Technology Future Earnings Per Share Growth

Risks

• Despite the improvement in bookings, DXC Technology experienced a 4.2% year-over-year decline in total revenue, suggesting challenges in achieving consistent revenue growth.
  
• Global uncertainties, including trade policy, geopolitical conflicts, inflation, and labor costs, continue to pressure corporate spending, which could negatively impact DXC's future revenues.
  
• The company's Global Infrastructure Services (GIS) segment saw a 7.8% decline in revenue, with profit margins also decreasing due to lower revenue and disposal charges, indicating potential risks to revenue and net margins.
  
• DXC's adjusted EBIT margins benefited temporarily from deferred marketing and IT investments, indicating that future margins might compress when these expenditures are aligned with business priorities.
  
• The financials reveal an underlying decline in free cash flow compared to the prior year, driven by incremental restructuring charges and changes in capital expenditures, which could impact earnings stability.

Valuation

• The analysts have a consensus price target of $23.111 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 $27.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.9 billion, earnings will come to $445.0 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 11.4%.
• Given the current share price of $17.35, the analyst price target of $23.11 is 24.9% higher.
• 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.