Cognizant Tech (CTSH +3%) saw a significant increase today following reports that activist firm Mantle Ridge has acquired over a $1 billion stake in the company. Mantle Ridge began building its stake in late 2022, and shortly after, CTSH appointed Ravi Kumar as the new CEO, who shifted the focus from stabilization to growth. In 2024, CTSH turned around its performance, starting with a 1.1% decline in Q1 and ending with a 6.8% increase in Q4, marking its best quarter since 2Q22.
- CTSH, similar to Accenture (ACN, Financial) but smaller, is capitalizing on the cloud and AI shift. With most workers in India, about three-quarters of its revenue comes from the U.S. Like ACN, CTSH is enhancing its workforce to support the growing demand for digital and AI capabilities.
- In Q4, CTSH experienced a strong year with significant large deal signings and bookings. The Health Sciences and Financial Services segments led the growth, with notable improvements in discretionary spending within Financial Services. Large deals rose to ten in Q4 from six the previous year.
- Despite a 40 bps yr/yr contraction in adjusted operating margins to 15.7%, margins improved 40 bps sequentially in Q4. Increased compensation costs impacted margins, but CTSH expects a margin expansion of 20-40 bps in FY25, driven by AI adoption and improved productivity.
- CTSH's Gen AI capabilities are gaining traction, with over 1,200 early Gen AI engagements by Q4, up from 1,000 in Q3. Management anticipates growing demand for AI services across industries, with applications in predictive analytics, drug discovery, and fraud detection. Current customers include Toyota (TM, Financial) and McDonald's (MCD, Financial).
As businesses increasingly rely on AI and cloud technologies, IT consulting firms like CTSH are becoming essential. CTSH has already gained 10% this year, outperforming ACN's 5% decline. Despite concerns about macroeconomic stability, CTSH offers potential for a return to all-time highs soon.
