Cognizant: Shares Are a Top Pick as Market Overlooks Halo Effect of Digital Transformation Trends

Cognizant CTSH is one of our top picks in the technology sector, as we see an attractive long-term investment opportunity in the narrow-moat firm implied in our $91 fair value estimate and our 5-star rating. We believe the market is significantly discounting Cognizant’s potential, penalizing the firm for past execution and strategic mistakes, which we believe are in the rearview mirror.

We think Cognizant is well positioned to continue to push its reputation past a back-office outsourcer to higher-value technical offerings—like digital engineering and AI solutions—as well as digital transformation consulting. We believe all the major IT services firms under are our coverage will benefit from digital transformation demand to some degree. Furthermore, we see no reason why Cognizant would be far less of a beneficiary of digital transformation—as the market is baking in. In our view, losers of digital transformation will be much smaller IT services players that lose out due to consolidation of accounts with larger vendors, like Cognizant. In contrast, Cognizant has a wide array of offerings that play into digital transformation needs, and we continue to believe its financial services platform is the best in the industry. As a beneficiary of consolidation, we believe Cognizant has the potential to further increase switching costs, which is the foundation of its narrow moat, along with intangible assets.

We bake in a five-year revenue compound annual growth rate of 8% for Cognizant, an acceleration of 5% over the last five years. We think this is feasible, as we believe that even with delayed decision-making in the current environment, demand for digital transformation projects in the long run is not diminishing—which is apparent in strong bookings. In fact, Cognizant’s trailing 12 months book/bill is a healthy 1.3, giving us confidence in future demand for Cognizant’s offerings.