Is Now the Right Time to Revisit Cognizant Shares After 3.9% Weekly Gain?

If you have been watching Cognizant Technology Solutions lately and wondering whether now might be the time to act, you are not alone. This global IT services giant has caught the eye of many investors, especially after its recent price swings. Over the past week, the stock has posted a solid gain of 3.9%, shaking off some of the hesitation that has weighed on its year-to-date performance, which is still sitting at -11.0%. The broader one-year return is also negative at -7.7%. Looking at a three-year view, there is a 15.6% gain to consider. These figures suggest that the bigger story here goes well beyond any single headline or trading session.

Recent news from the tech consulting sector, including Cognizant's ongoing push into digital transformation and expanded commitments to newer verticals, has helped fuel market optimism. There is also growing buzz around the company’s strategic partnerships and investments in AI-enabled solutions. Although these developments have not always triggered immediate share price jumps, they have built a case for stronger long-term growth expectations and potentially a change in how the market perceives risk for Cognizant going forward.

But is all this momentum actually translating into a bargain for value investors? By our checks, Cognizant scores a 6 out of 6 on our valuation scale, signaling it is undervalued by every metric we consider. Up next, we will break down each of these valuation methods. There is also a more insightful approach to valuing this company that we will cover later in the article.

Why Cognizant Technology Solutions is lagging behind its peers

Approach 1: Cognizant Technology Solutions Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model provides a method of valuing a company by estimating its future cash flows and discounting them back to today's value. In Cognizant's case, current annual Free Cash Flow stands at approximately $2.24 billion. Analysts project steady growth over the coming years, with Free Cash Flow expected to reach roughly $3.31 billion by 2028. Beyond that, longer-term estimates are extrapolated based on recent trends and industry benchmarks, projecting over $4.58 billion in annual Free Cash Flow by 2035.

This DCF model uses a two-stage approach, reflecting higher analyst certainty for the next five years and greater reliance on trend analysis thereafter. After discounting all these projected cash flows back to the present, Cognizant’s intrinsic value is estimated at $118.15 per share. With the DCF calculation indicating a 42.4% discount to the current share price, the stock is currently considered significantly undervalued by this model.

Result: UNDERVALUED

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

Our Discounted Cash Flow (DCF) analysis suggests Cognizant Technology Solutions is undervalued by 42.4%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Cognizant Technology Solutions Price vs Earnings

For companies like Cognizant Technology Solutions that generate consistent profits, the Price-to-Earnings (PE) ratio is one of the most popular and relevant metrics for valuation. This ratio tells investors how much they are paying today for every dollar of company earnings and is especially useful for comparing companies with established earnings histories.

The appropriate PE ratio for any business depends on the potential for future growth and the risks that might affect those future profits. Fast-growing or lower-risk companies typically command higher PE multiples, while slower-growing or riskier businesses usually trade at lower ones. This is because investors are willing to pay more for predictable and growing earnings streams.

Currently, Cognizant Technology Solutions is trading at a PE ratio of 13.6x, which is noticeably below both the IT industry average of 30.0x and the peer average of 20.9x. On the surface, this suggests Cognizant could be undervalued. However, just comparing headline ratios can overlook important factors such as the company’s actual earnings growth, its competitive position, profit margins, and exposure to industry risks.

This is where the Fair Ratio comes in. The Fair Ratio, calculated by Simply Wall St, estimates what Cognizant’s PE should be based on a fuller picture: its growth outlook, profit margins, level of risk, industry placement, and market capitalization. This proprietary metric provides a more tailored benchmark, rather than just using broad industry or peer numbers.

According to Simply Wall St, Cognizant’s Fair Ratio is 31.7x. This is more than double its current 13.6x PE, indicating that the market is not factoring in the company’s long-term strengths and growth profile. Based on this, the shares are trading well below what would be considered fair value using this method.

Result: UNDERVALUED

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

Upgrade Your Decision Making: Choose your Cognizant Technology Solutions Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is simply your story about a company; it is the way you link your beliefs about Cognizant’s business future to concrete financial forecasts like future revenue, margins, and fair value. Narratives connect what you know or believe about a business with real numbers, bridging the gap between company developments and valuation, and are available as an easy-to-use feature on Simply Wall St’s Community page (where millions of investors share ideas).

With Narratives, you can track and refine your own investment perspective by building forecasts and seeing how they compare to current valuations. Narratives dynamically update when new information is released, such as news, results, or industry shifts, helping you see instantly how these changes might affect Cognizant’s fair value. For example, some investors see Cognizant’s aggressive AI expansion and strong deal wins as justification for a bullish Narrative (using the high analyst target of $103.0), while others are more cautious given industry headwinds and suggest a more reserved outlook (low target at $75.0). Narratives empower you to make timely buy or sell decisions based on your story, your assumptions, and the live relationship between Fair Value and current Price.

Do you think there's more to the story for Cognizant Technology Solutions? Create your own Narrative to let the Community know!

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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