Cognizant Earnings: Financial Services on the Mend and Health Services Growth Strong

Key Morningstar Metrics for Cognizant Technology Solutions

• Fair Value Estimate: $94.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

What We Thought of Cognizant Technology Solutions’ Earnings

Cognizant COG posted a solid third quarter, with results coming in slightly above our expectations, as the industry is seeing a steady improvement in customer spending, especially in financial services, which is gaining greater wallet share growth as customers reorient themselves with more discretionary projects. This is encouraging, as financial services tend to be the greatest revenue contributor for IT services firms, including Cognizant.

Furthermore, we still consider Cognizant’s financial services banking platform best of breed, making its recovery very welcome, even if it’s gradual. We are reiterating our fair value estimate of $94 per share for the firm, as we see it set to win a good portion of AI workloads throughout its segments. Shares are up 4% in after-hours trading but still leave significant upside, in our view.

Cognizant’s total revenue increased by 3% year over year, as reported, to $5 billion in the third quarter, at the high end of management’s guidance. Financial services revenue returned to year-over-year revenue growth, growing by a slight 0.7% year over year in the quarter, as customers started to warm up to more discretionary spending again. Health sciences grew nicely at 7.8% year over year—showing solid acceleration from the prior-year period due to broad-based strength.

Adjusted operating margins of 15.3% marked a year-over-year contraction of 20 basis points, leading to posted non-GAAP earnings per share of $1.25.

In the fourth quarter, Cognizant expects revenue between $5.0 billion and $5.1 billion. In addition, the firm raised its fiscal 2024 revenue guide to between $19.7 billion and $19.8 billion (from $19.3 billion-$19.5 billion). Adjusted operating margins are expected to be 15.1% in fiscal 2024, which led to adjusted EPS guided between $4.63 and $4.67 (as opposed to $4.62-$4.70 previously).