Technology research and advisory firm Gartner (NYSE:IT) has been a fixture in the world of information technology and business analytics for decades.
Over the last year, however, its stock has shed nearly half of its value amid concerns around AI disruption, slowing growth and Gartner’s competitive position.
How much risk does AI present to Gartner stock, and is IT a potentially good buy while it remains sold off?
AI’s Risks to Gartner’s Competitive Position
The fundamental risk that Gartner and other large advisory firms face from AI is the possibility that the technology will, over time, reduce the value of their services. With AI tools becoming more sophisticated and better able to provide insights to businesses that once required firms like Gartner, AI could create a fundamental sea change in the industry.
Furthermore, these changes could raise competitive risks for Gartner by giving other large advisory businesses the chance to leapfrog it by integrating AI more effectively into their services. As recently as a few years ago, Gartner was thought to have a strong competitive moat formed by a combination of its massive amount of research insights and its longstanding relationships with large businesses. Though its research edge remains, the potential for AI insights to disrupt the traditional advisory business and eat into Gartner’s subscriptions is difficult to ignore.
The result of such impacts could be large, eventually affecting both Gartner’s top and bottom lines. To some degree, the problems created for Gartner by AI may already be starting to show up in its current performance. Earlier in the decade, Gartner’s revenue growth was consistently in double-digit territory.
As of the Q2 earnings report, however, revenue growth had slowed to 5.7 percent, and contract value growth came in at 5 percent. It’s worth noting, however, that management primarily attributes the slower growth rate to macroeconomic pressures and not technological changes that are fundamentally weakening Gartner’s business.
Some observers are also concerned by management’s seeming slowness to address waning growth and a shifting competitive landscape. Specifically, Gartner may be a victim of its own historical success, preventing management from fully acknowledging the risks that AI could pose to the business in the long run. If this proves to be the case, Gartner could find itself racing to catch up with an industry that is shifting out from under its feet due to technological changes.
How Gartner Itself Is Using AI
While it’s clear that there are some potentially significant risks to Gartner from AI, it’s also worth acknowledging that the technology could present opportunities for the business.
The AskGartner tool that Gartner is in the process of rolling out is an AI-powered tool meant to provide insights and faster access to the trove of business and technology data Gartner has built up. If deployed successfully, such tools could add to the value of Gartner’s services, thus allowing it not only to survive but return to higher levels of growth.
Even so, the business may be falling behind competitors like McKinsey and Deloitte when it comes to delivering value to customers with AI.
Gartner will also have to be able to deliver superior results than less-expensive AI tools that businesses can use to build their own in-house systems in order to keep justifying its costs. Gartner’s position hasn’t yet been undermined by AI, but the landscape in which it operates has changed significantly.
Is IT Stock at Risk of Overvaluation?
Another element to consider when looking at Gartner as an investment is its valuation. IT shares are trading at a P/E of 15.5, far below both the sector average of 23.7 and Gartner’s own P/E range over the last five years. Gartner’s price multiple to operating cash flow is similarly reasonable at 12.9.
These valuation metrics suggest that the market has already somewhat priced in the potential risks of AI and that the stock could even be a bit undervalued.
The view that IT could be undervalued is reflected in analyst forecasts, which assign an average target price of $304.78 to Gartner over the coming 12 months. Against its most recent price of $251.19, this would imply a potential upside in excess of 21 percent. It’s worth noting, however, that this analyst optimism is somewhat tempered by the fact that the consensus rating for IT is a hold rather than a buy.
How Risky Is Gartner Today?
Considering the risks that Gartner could be facing both in terms of industry disruption and threats to its competitive moat, there appear to be legitimate reasons to be skeptical where IT stock is concerned. With AI potentially shaking up its advisory business and growth already slowing, the business may be in for a period of elevated uncertainty ahead.
On the other side of the coin, IT shares are currently trading at a significant discount to their historical prices and could be somewhat undervalued after the selloff they’ve faced this year.
Gartner is also keeping up a vigorous share buyback program, having repurchased $274 million worth of its own stock in Q2. Management also increased the share buyback authorization by $700 million. Between low pricing and a habit of returning cash to shareholders, Gartner may have some appeal to value investors who are willing to take a chance on its AI-related risks.
Gartner even remains quite profitable in spite of its possible difficulties, boasting a trailing 12-month net margin of 19.7 percent and a return on invested capital of 30.5 percent. Even with Q2’s weaker revenue growth, EPS rose 6.1 percent to $3.11. Free cash flow growth was lower but still positive at 2.0 percent, resulting in FCF of $347 million.
Taking both of these views into account, Gartner may be a decent hold, but buying it may be on the risky side, even at its current depressed prices. Gartner is still a strong, profitable business with potential opportunities ahead of it, especially as it rolls out its own AI-enabled tools.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.