Digital Transformation Will Expand IT Markets Amid Legacy Challenges

Key Takeaways

• Strategic wins in large, high-quality contracts and AI-driven capabilities position the company for enhanced revenue growth and long-term margin expansion.
  
• Leadership stability and operational improvements support ongoing efficiency gains, unlocking new recurring revenue and premium pricing in regulated, high-compliance sectors.
  
• Declining revenues, margin pressure, shrinking legacy demand, execution challenges, and intensifying competition threaten DXC's long-term growth, profitability, and market position.

Catalysts

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

• Analyst consensus expects bookings momentum and a solid book-to-bill ratio to eventually stabilize revenues, but this substantially underestimates the impact of DXC's pivot to larger, longer-duration, higher-quality contracts-these strategic wins, such as the Carnival mega-deal, are setting up a step-change that will drive both revenue growth and long-term revenue visibility well above current expectations.
  
• While analysts broadly agree that expanded AI and consulting capabilities will improve future revenues, DXC's foundational investments in replicable, ROI-driven AI frameworks and cross-industry case studies position the company to become an early winner as generative AI crosses from pilot to enterprise-scale deployments, supporting both top-line acceleration and structurally higher margins.
  
• DXC's unique end-to-end capabilities across cloud, infrastructure, applications, and cybersecurity, together with heightened global demand for digital transformation and managed hybrid IT environments, set the company up to capture a greater share of multibillion-dollar IT outsourcing contracts as enterprises consolidate vendors-creating sustained, higher-margin revenue streams.
  
• Recent radical improvements in leadership stability, operational discipline, and realignment of compensation incentives have put the company in "execution overdrive," which should allow already-realized efficiency gains and cost reductions to rapidly expand net margins beyond what's currently baked into consensus earnings models.
  
• The breakout and focus on insurance and vertical software, combined with long-term growth in data analytics and regulatory-driven security needs, are likely to unlock new recurring revenue pools and premium pricing opportunities-specifically in complex, high-compliance industries-further strengthening both revenue quality and profitability.

DXC Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on DXC Technology compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming DXC Technology's revenue will decrease by 4.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 3.0% today to 2.2% in 3 years time.
• The bullish analysts expect earnings to reach $244.6 million (and earnings per share of $0.9) by about July 2028, down from $389.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from 6.8x today. This future PE is lower than the current PE for the US IT industry at 27.6x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

DXC Technology Future Earnings Per Share Growth

Risks

• The ongoing decline in organic revenue, with fiscal 2025 revenue falling by 4.6% year-over-year and management guiding to an additional 3% to 5% organic revenue decline in fiscal 2026, signals that DXC's core markets may be shrinking or that it is losing share, which poses a significant risk to long-term top-line revenue growth.
  
• Persistent margin pressure is evident, as adjusted EBIT margin for fiscal 2026 is expected to be between 7% and 8%, lower than the prior year midpoint, and this reflects the need for ongoing investments just to stay competitive and drive transformation, thereby constraining net margins even as revenue contracts.
  
• Shift to cloud, automation, and AI across the industry continues to erode demand for traditional outsourcing and legacy IT infrastructure services, while the company admits to facing ongoing "market pressures on custom application projects"; this risk shrinks the overall addressable market for legacy offerings and threatens both revenue and earnings.
  
• Difficulty in consistently securing new large-scale contracts and rebuilding customer acquisition capabilities, as well as high turnover and ongoing leadership changes, highlight execution risk and may impair client confidence, contributing to continued customer attrition and higher SG&A expenses, which weaken both revenue retention and earnings stability.
  
• Heightened competition from cloud-native, low-cost offshore providers is driving pricing pressure and commoditization, and although management states the pricing environment is currently stable, secular trends may force DXC to sacrifice margins to maintain share, endangering both profitability and market share over the long term.

Valuation

• The assumed bullish price target for DXC Technology is $18.88, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of DXC Technology's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.88, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $11.2 billion, earnings will come to $244.6 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 11.6%.
• Given the current share price of $14.63, the bullish analyst price target of $18.88 is 22.5% 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.