Cognizant Technologies (NASDAQ:CTSH) is a global provider of IT services that specializes in outsourced services. After a period of stagnation over the past couple of years, Cognizant is finally growing again.
This may well make the business appealing to investors, especially given that the earnings per share are projected to grow at a rate of almost 8% annually over the next few years.
So what does the stock look like today and in 5 years?
Cognizant Is Getting Back on Track for Growth
From late 2022 through mid-2024, Cognizant experienced a revenue growth shortfall, causing the top line during that period to plateau.
Over the last few quarters, it has been able to demonstrate accelerating growth, culminating in a 7.5% year-over-year revenue increase in Q1 of this year. This wasn’t just the best sales growth Cognizant has posted since early 2022, but it was also above the guidance range management had previously offered for the quarter.
Management was also able to deliver GAAP EPS of $1.34 and adjusted EPS of $1.23, up 22% and 10% over the previous year, respectively. Trailing 12-month bookings rose 3% to a total of $26.7 billion.
Bookings were a fly in the ointment in Q1 and did tumble by 7% relative to the year-ago quarter. While the broader trend is still basically positive, this decrease in Q1 bookings could reflect lower demand for Cognizant’s services as the economy enters what is expected to be a period of weaker performance.
Beyond its financial metrics, Cognizant also delivered some fairly positive business highlights in the first quarter. The company secured a variety of new contracts, including an expanded agreement with Docusign. Another notable agreement was entered into with Citizens Financial Group that will see Cognizant build out a 1,000-person outsourced technology center for the bank.
One of the major growth opportunities in front of Cognizant right now comes from facilitating AI adoption. It has already made significant progress in this area, offering a wide range of data and AI services to its customers.
Is Cognizant a Good Income Play and Valued Well?
Unlike most tech-focused companies, Cognizant also pays a fairly healthy dividend. CTSH shares yield 1.5%, a bit above the average yield among the S&P 500 right now.
The good news for dividend growth investors is the fact that Cognizant’s dividend payout ratio is still only a little over 25%, meaning that management still has a great deal of room for future increases.
The dividend may also make the stock more attractive in today’s market given that volatility tends to favor the guaranteed returns produced by dividends.
While the stock may not actually be undervalued, Cognizant does appear to trade at a relatively fair price. Shares of CTSH are currently trading at 16.8x earnings and 2.0x sales, neither of which appears excessive for a company that is successfully returning to positive growth.
Analyst forecasts for Cognizant also suggest a modest but respectable level of upside. With shares currently priced at $79.90, the range of standing analyst price targets runs from $79 to $103 with an average of $87.29. This suggests limited perceived room for downside and an upside of about 9.3% if the stock reaches the average price target in the next 12 months.
What’s The Biggest Threat?
Ironically, one of Cognizant’s largest opportunities may also pose the greatest risk to the company. Improved AI has the potential to eventually reduce demand for outsourced IT services as companies turn to artificial intelligence in place of human experts.
With that said, Cognizant is clearly making an effort to get out in front of the disruption that AI could produce in its industry. It remains to be seen, however, whether AI will ultimately help or harm the IT outsourcing industry in the long run.
To a lesser degree, Cognizant may also be subject to risks related to economic policy. As an IT outsourcing company, Cognizant could be negatively impacted by policies designed to re-shore jobs to the United States.
Although the Trump administration has yet to specifically target outsourced jobs of the type Cognizant specializes in, it’s entirely plausible that the company could get caught up in future efforts to bring IT jobs back to the US.
Where Will Cognizant Stock Be In 5 Years?
Analysts forecast that Cognizant stock will reach $87.29 per share within the next 5 years based on a discounted cash flow forecast consensus.
With its performance turning around and its valuation looking fairly reasonable, there’s a good bit to like about CTSH. If the company can keep its growth rate up, investors who buy at today’s prices could see steady gains, albeit probably not at the blistering pace that many of the largest tech companies have produced over the last couple of years.
One of the tailwinds for shareholders looking over the horizon is the persistent share buyback program. In March, the Board announced that it was adding $2 billion to its share buyback authorization and that brought the total to $3.1 billion.
The leadership team expects to buy back about $1.1 billion of shares this year so when you combine it with the dividend an ample amount should make its way back to shareholders pockets.
Nonetheless, the lower bookings in Q1, for instance, are perhaps a sign that growth will stall out again as weaker conditions make businesses less willing to invest in new IT initiatives. In addition, uncertain long-term impacts of AI will create some concerns among investors looking at Cognizant for the first time.
All told, though, Cognizant is a moderate buy thanks to the potential for additional growth, fair valuation and habit of pushing cash back to shareholders all make it appealing as an investment. Though Cognizant may not produce the fastest returns in the stock market, it seems more likely than not that it will continue to appreciate over time and steadily benefit its shareholders.
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.