Q1 25 results boost Cognizant's market value

Published: 2025-06-18 04:03:57 ET CTSH

Published on 06/18/2025 at 04:03

By Joshua Cooper

Cognizant released its Q1 25 results on April 30, 2025, reporting a 7.5% y/y revenue increase, reaching $5,115m. This growth was driven by strategic acquisitions and strong segmental performance. Operating income rose by 8.9% to $927m, with a margin expansion of 25bp to 18.1%. Net income surged by 21% to $663m, outpacing revenue growth. Following the announcement, the share price increased by 2.3% the next day and has risen 9.8% since the announcement.

Cognizant Technology Solutions Corporation was established in 1994 and is headquartered in Teaneck, New Jersey, is a global leader in information technology services, offering comprehensive solutions across various industries. The company specializes in technology infrastructure management, ERP implementation, and advanced decision-making applications. Cognizant excels in digital transformation consulting, cloud services, and AI-powered solutions, enhancing operational efficiency and customer engagement. Cognizant’s partnerships with major platforms like AWS and Google Cloud ensure seamless digital experiences and sustainable, resilient business models.

The company has about 336,300 employees and operates in four main segments: Health Sciences, which contributed 30% of total revenue in FY 24; Financial Services, accounting for 29%; Products and Resources, making up 24%; and Communications, Media, and Technology, which generated 17%. Geographically, the majority of the company's revenue came from the US at 74%, followed by Continental Europe at 10%, the UK at 9%, and the remaining 7% from the rest of the world.

On May 22, 2025, Cognizant and Pegasystems announced a partnership to drive AI-led transformation in enterprise legacy modernization. This collaboration enhances Cognizant's modernization services with Pega Blueprint, helping enterprises reimagine legacy transformation projects and build future-ready systems. The partnership aims to address the high costs associated with legacy systems, including operations, maintenance, licensing, poor customer experience, inefficient processes, and lack of real-time data.

By integrating Cognizant's IP with Pega Blueprint capabilities, the collaboration will enable rapid cloud transformations for joint clients. Cognizant associates will leverage a suite of rapid development tools and initiatives, such as Bluebolt, Cognizant's grassroots innovation program, to quickly convert ideas into Minimum Viable Products. This strategic collaboration is set to deliver significant improvements in efficiency and customer experience for enterprises on legacy systems.

Cognizant has posted a modest revenue CAGR of 2.2% over FY 21-24, reaching $19.7bn, driven by the ramp up of several large deals. Operating income rose at a CAGR of 1.5% over the same period, reaching $3.5bn in FY 24, with a margin of 17.8%. Net income increased with a CAGR of 1.6% to $2.2bn in FY 24.

Net income led to positive FCF over the last three years (FY 21-24), reaching $2.2bn in FY 24 from $1.8bn in FY 21. As a result, cash and cash equivalent increased from $1.8bn to $2.2bn by end-FY 24. The gearing calculated as total debt-to-equity decreased from $1.7bn to $1.5bn during the same period. Consequently, its gearing improved from 13.8% to 10.4%.

In comparison, the company’s local peer IBM Inc., grew with a revenue CAGR of 3.1% over FY 21-24, reaching $62.8bn in FY 24. Operating income grew at a CAGR of 4.2% to $13.6bn. However, net income rose at a CAGR of 1.6%, reaching $6bn.

Looking ahead, analysts anticipated revenue CAGR of 5.5% over FY 24-27, reaching $23.2bn. In addition, analysts expect EBITDA CAGR of 7% to $4.4bn, with margins expanding by 79bp to 18.8% in FY 27. Net income CAGR of 8.8% to $2.9bn. Likewise, analysts estimate an EBITDA CAGR of 6% and a net profit CAGR of 19.9% for IBM.

Over the past year, the company's stock has delivered impressive returns of approximately 21.7%. In comparison, IBM’s stock has delivered higher returns of about 67% over the same period. In addition, the company paid an annual dividend of $1.2 in FY 24, resulting in a modest dividend yield of 1.6%. Moreover, analysts expect an average dividend yield of 1.7% over the next three years.

Cognizant is currently trading at a P/E of 15.5x, based on the FY 25 estimated EPS of $5.2, which is lower than its 3-year historical average of 16x and that of IBM’s valuation of 31.2x. In terms of EV/EBITDA, the company is currently trading at 9.7x, which is higher than its 3-year historical average of 9.5x but lower than IBM (17x).

Cognizant is somewhat liked by 26 analysts, with four of them having ‘Buy’ ratings, three having ‘Outperform’ ratings and 19 having ‘Hold’ ratings, with an average target price of $87.4, implying 9.6% upside potential from its current price.

Overall, the company's Q1 25 results have boosted its stock, thanks to strategic acquisitions and robust segment performance. A partnership with Pegasystems aims to modernize legacy systems using AI. However, the group faces several risks, including increased competition in the IT services industry, geopolitical uncertainties, potential cyber threats, fluctuations in foreign currency exchange rates, and changes in government regulations.

Joshua Cooper