Does Capgemini’s AI Push Signal Opportunity After Recent 7.6% Price Drop?

• Wondering if Capgemini's stock offers hidden value or if recent market trends have changed the story? You're in the right place to get a clear perspective.
• Capgemini's share price has seen sharp swings lately, dropping 7.6% over the past week but managing to notch a modest 1.1% gain over the last month and a 17.4% return over five years. This points to both volatility and longer-term potential.
• Recent headlines have spotlighted Capgemini's strategic acquisitions and fresh partnerships in the digital transformation and AI sectors, stirring investor interest and at times fueling market jitters. These developments occur amid rapidly evolving tech trends, which help explain why markets are reacting so dynamically to the company's moves.
• Out of 6 key valuation checks, Capgemini scores 5, suggesting it looks undervalued by most standard measures. However, not all valuation approaches are created equal. Here is a breakdown of how they're applied to Capgemini, plus a note on how to put these numbers in better context.

Find out why Capgemini's -22.2% return over the last year is lagging behind its peers.

Approach 1: Capgemini Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates what a company is really worth by projecting its future cash flows and then “discounting” them back to today’s value. This helps investors gauge if the current share price reflects those future earnings.

For Capgemini, the latest reported Free Cash Flow stands at approximately €2.16 billion. Analyst forecasts provide specific estimates up to five years out, after which growth is extrapolated by Simply Wall St to complete a ten-year horizon. By 2029, Capgemini’s projected Free Cash Flow rises to €2.67 billion. By 2035, forecast figures approach €3.32 billion, though long-term numbers are less certain.

Using these projections, the DCF model estimates an intrinsic value for Capgemini of €213 per share. With the model indicating a 42.1% discount to the current market price, Capgemini stock appears substantially undervalued according to this methodology.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Capgemini is undervalued by 42.1%. Track this in your watchlist or portfolio, or discover 870 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Capgemini.

Approach 2: Capgemini Price vs Earnings (PE Ratio)

The Price-to-Earnings (PE) ratio is a go-to metric when valuing consistently profitable companies like Capgemini. It gives investors a way to gauge how much they're paying for each euro of earnings, helping to compare companies of different sizes or across industries.

What counts as a fair or normal PE ratio is not universal; it depends on factors like the company’s growth prospects and overall risk. Faster-growing firms or those with more reliable earnings typically command higher multiples, while businesses with slower growth or higher risk tend to have lower ones.

Capgemini currently trades at a PE ratio of 13.4x. That is slightly ahead of its average peer at 11.2x and significantly below the IT industry average of 21.5x. On the surface, this lower multiple compared to the industry could signal that Capgemini is attractively valued, especially if it is growing reliably.

To add more nuance, Simply Wall St calculates a “Fair Ratio,” which for Capgemini stands at 25.5x. Unlike a simple peer or industry average, the Fair Ratio is tailored to the company, weighing its earnings growth, profit margins, industry characteristics, market cap, and risk factors. This approach yields a more holistic benchmark than just looking at the averages.

Here, Capgemini’s PE ratio (13.4x) sits well below its Fair Ratio (25.5x), suggesting the stock is undervalued even when accounting for its unique financial traits and future prospects.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1396 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Capgemini Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let's introduce you to Narratives. A Narrative is your unique take on a company, built by connecting what you believe about its business outlook with data-driven financial forecasts, like estimates for future revenue or profit margins, to arrive at a fair value per share. Instead of just focusing on numbers or ratios, Narratives let you tell the story behind the numbers. For example, you might think Capgemini's AI strategy will help it outpace competitors, or you may believe that economic headwinds will keep growth subdued.

This approach makes investing more accessible and dynamic because, as new information emerges such as earnings releases or major industry news, Narratives on Simply Wall St's Community page update automatically in real time. This keeps your decision-making fresh and relevant. Investors use Narratives to compare their own fair value with the latest share price, helping them decide when to buy or sell based on what they believe is most likely for the business.

For Capgemini, some investors currently see a fair value as high as €214 if digital partnerships and margin expansion accelerate. Others project a value of just €134 if revenue risks materialize. Your Narrative can reflect your optimism or caution, making your investment strategy both personal and informed.

Do you think there's more to the story for Capgemini? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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