CTSH: When the Gold Rush Comes, Invest in Shovels

Cognizant Technology Solutions Corp (NASDAQ: CTSH) Stock Pitch

Investment Overview

Cognizant Technology Solutions Corp (CTSH) is a technology consulting firm focused on modernizing digital services across various industries. The company provides consulting in application development, system integration, cloud infrastructure, cybersecurity, business process automation, and AI-driven solutions.

Company Overview

  • Current Price: $90.70 (86.32 at time of research)

  • Target Price (1 Year): $108 (+20%)

  • Valuation: PE(20.13) * EPS(5.39)

  • Key Services: Application security, AI hubs, cloud transformation, infrastructure modernization

  • Key Partnerships: Adobe, Dell, Google Cloud, IBM, Palantir, Shopify, Workday, CrowdStrike

  • Geographic Reach: Operates in over 40 countries

  • Deal Activity: Closed 29 deals over $100M in 2024 (17 in 2023)

Investment Thesis

  • Attractive Valuation:

    • PE Ratio: 20.13 vs. Bloomberg ANR comp median of 25.65

    • EV/EBITDA: 11.35 vs. Bloomberg ANR comp median of 17.07

  • Acquisition Strategy: Cognizant has completed 6 acquisitions in the last 2 years, strengthening its technological capabilities and market presence.

  • Revenue Growth:

    • Healthcare revenue up 10%, led by TriZetto (processes ~66% of US healthcare claims)

    • North American revenue up 8.3% to $3.8B

    • Q4 revenue jumped by 450 bps YoY, largely driven by Belcan and Thirdera acquisitions

Catalysts

  • Tariff & Interest Rate Impact:

    • Tariff implementation and a higher interest rate environment could strengthen the USD against INR (24% of Cognizant’s expense base is in rupees).

    • Stronger USD lowers operating expenses, improving margins.

    • Higher US interest rates attract foreign capital, strengthening the dollar.

  • Political Tailwinds:

    • Potential Trump re-election could bring deregulation in antitrust laws, increasing M&A deal flow.

    • Expected rollback of Biden’s Section 5 broadening of FTC oversight, leading to fewer restrictions on M&A.

    • Tax cuts and reduced legal barriers could allow Cognizant to further expand via acquisitions.

  • M&A Execution:

    • Recently acquired Belcan for $1.3B, a key supplier in aerospace, defense, automotive, and industrial markets.

    • Acquisition-driven revenue boost, as seen in Q4 2024’s 450 bps revenue increase.

Risks & Mitigation

  • Sector Dependency: Cognizant relies on tech, financial, healthcare, and product/resource sectors. Fee and contract-based revenue could be impacted by margin compression due to tariffs.

    • Mitigation: Diversifying through acquisitions (e.g., Palantir, Belcan) to broaden service offerings.

  • Foreign Currency Risk: 26.3% of revenue comes from international markets, and 24% of costs are INR-denominated.

    • Mitigation: Cognizant hedges FX exposure using forward and option contracts.

    • Alternative Strategy: A long INR hedge could counterbalance a weaker USD impact.

Conclusion

Long CTSH with a 12-month price target of $108. The combination of a favorable macro environment (tariffs, interest rates, deregulation), undervaluation relative to peers, strong M&A execution, and AI/cloud transformation tailwinds positions Cognizant for upside potential.

Appendix (For Follow-ups)

Key Metrics & KPIs

  • P/E: 20.13

  • P/B: 2.87

  • Revenue Growth: 8.3% in North America, 10% in Healthcare

  • Goodwill as % of Assets: 14.26% (higher than comp median of 1.44%)

Earnings Call Notes

  • Associate consulting ideas doubled to 240K, with 47K solutions implemented by clients.

  • AI deployment for internal and client operations (identified 200 AI use cases).

  • Renewed deal with McDonald's for finance system and human capital management.

  • Signed a deal with Toyota for GenAI integration in software development.

  • 20 bps upward revision in 2025 operating margin expectations.

Appendix
Comparable Companies Obtained from Bloomberg ANR & SEC 10K filings

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