Morningstar

Cognizant Earnings: Favorable AI Competitive Position Should Make Way for Bigger Market Share

We believe Cognizant has a bigger role to play in the IT services world.

In this photo illustration, the Cognizant Technology Solutions Corporation logo is seen displayed on a smartphone screen.
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Securities in This Article
Cognizant Technology Solutions Corp Class A
(CTSH)

Key Morningstar Metrics for Cognizant Technology Solutions

What We Thought of Cognizant Technology Solutions’ Earnings

Cognizant Technology Solutions’ CTSH strong growth momentum was evident in its second-quarter results, with revenue up 7% in constant currency to $5.2 billion. Adjusted operating margin expanded 100 basis points year over year, highlighting continued margin gains from Cognizant’s cost-oriented NextGen program.

Why it matters: The Belcan acquisition’s revenue growth contribution of 400 basis points this quarter was healthy, in our view. Health sciences and financial sciences recorded 5% and 6% growth, respectively, which supports our belief that Cognizant is taking market share from competitors.

  • Cognizant’s trailing 12-month bookings set a new record of $28 billion, driven by two $1 billion mega deals. The solid book/bill ratio of 1.4 also underpins customers’ strong confidence in Cognizant’s offerings as they increase their booking sizes in a volatile economy.
  • Sequential headcount growth of 7,500, or over 2%, was the highest in nearly three years. Given Cognizant’s stable voluntary attrition of 15% and utilization rate of 85%, we believe the additional headcount reflects a sanguine outlook for new demand around artificial intelligence-led projects.

The bottom line: We maintain our $84 fair value estimate for narrow-moat Cognizant. Shares look slightly undervalued to us, and we believe Cognizant has a bigger role to play in the IT services world as more enterprises adopt AI-based tools in their workflows.

  • Recent acquisitions such as Thirdera radically enhanced Cognizant’s capabilities as a system integrator that calibrates enterprise platforms for customers. As vendors like ServiceNow roll out more agentic AI features, Cognizant is prepared to capture incremental IT service needs.

Coming up: Management now expects full-year revenue growth of 4.7%-6.7%, compared with 3.9%-6.4% previously. Third-quarter revenue growth guidance of 4.6%-6.1% was slightly higher than we expected, given the comparison base is tougher than this quarter.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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