Insights

Why Cognizant Technology Solutions Stock Tanked 13% Today

What happened
Shares of Cognizant Technology Solutions (NASDAQ: CTSH) were down 12.8% today at market close. It wasn’t alone in getting severely punished. The Nasdaq Composite Index was down 5% as investors assessed the Federal Reserve’s decision to increase interest rates by 0.5% yesterday and indicated more such moves were possible in the coming months in an effort to fight inflation.
As a reminder, higher interest rates lower the value of risk assets like stocks. That, at least in part, explains the widespread pain on Wall Street today.
Image source: Getty Images.

So what
Cognizant, in particular, had an added catalyst in the form of first-quarter 2022 earnings results. The IT services and consulting group reported revenue of $4.8 billion in the period, nearly 10% higher than a year ago. Adjusted earnings per share were up 11% to $1.08. Both revenue and earnings were slightly higher than what stock analysts were forecasting.
Now what
The real rub with investors, it seems, was Cognizant’s outlook. At the midpoint of guidance, revenue is expected to increase 8.2%, lower than the 8.8% midpoint outlook provided three months ago, as factors ranging from a general economic slowdown and currency-exchange issues drag down the company’s growth trajectory. Additionally, expected full-year adjusted earnings per share were also lowered to $4.45 to $4.55, compared with $4.46 to $4.60 before.
It certainly wasn’t a catastrophic update to Cognizant’s financials, but this illustrates the fragile mood investors are in right now. Any perceived weakening in business is being greeted with panic amid the backdrop of inflation, war in Eastern Europe, and the Fed’s measures to try and cool down inflation. 
Even after the recent sell-off, a slow-and-steady company like Cognizant isn’t exactly cheap at 16 times expected 2022 adjusted earnings. Nevertheless, for investors with a long-term time horizon, market panic like what was experienced today tees up buying opportunities for companies with lots of future potential. Despite the weaker outlook for the rest of the year, Cognizant is still seeing healthy demand for IT consulting and digital-transformation services.
Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Cognizant Technology Solutions. The Motley Fool has a disclosure policy. –

What happened

Shares of Cognizant Technology Solutions (NASDAQ: CTSH) were down 12.8% today at market close. It wasn’t alone in getting severely punished. The Nasdaq Composite Index was down 5% as investors assessed the Federal Reserve’s decision to increase interest rates by 0.5% yesterday and indicated more such moves were possible in the coming months in an effort to fight inflation.

As a reminder, higher interest rates lower the value of risk assets like stocks. That, at least in part, explains the widespread pain on Wall Street today.

Image source: Getty Images.

So what

Cognizant, in particular, had an added catalyst in the form of first-quarter 2022 earnings results. The IT services and consulting group reported revenue of $4.8 billion in the period, nearly 10% higher than a year ago. Adjusted earnings per share were up 11% to $1.08. Both revenue and earnings were slightly higher than what stock analysts were forecasting.

Now what

The real rub with investors, it seems, was Cognizant’s outlook. At the midpoint of guidance, revenue is expected to increase 8.2%, lower than the 8.8% midpoint outlook provided three months ago, as factors ranging from a general economic slowdown and currency-exchange issues drag down the company’s growth trajectory. Additionally, expected full-year adjusted earnings per share were also lowered to $4.45 to $4.55, compared with $4.46 to $4.60 before.

It certainly wasn’t a catastrophic update to Cognizant’s financials, but this illustrates the fragile mood investors are in right now. Any perceived weakening in business is being greeted with panic amid the backdrop of inflation, war in Eastern Europe, and the Fed’s measures to try and cool down inflation. 

Even after the recent sell-off, a slow-and-steady company like Cognizant isn’t exactly cheap at 16 times expected 2022 adjusted earnings. Nevertheless, for investors with a long-term time horizon, market panic like what was experienced today tees up buying opportunities for companies with lots of future potential. Despite the weaker outlook for the rest of the year, Cognizant is still seeing healthy demand for IT consulting and digital-transformation services.

Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Cognizant Technology Solutions. The Motley Fool has a disclosure policy.

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