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Stock Strategist Industry Reports

Visa Reform Raises Uncertainty for Offshore IT Services

Our long-term opinion of the industry is unchanged, and we see options for the firms to lessen the burden.

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In the wake of a sweeping U.S. immigration ban, the executive order for which was signed by President Donald Trump on Jan. 27, we are seeing repercussions and volatility for the information technology services industry, which relies on the movement of both temporary and permanent immigrants. According to early reports, programs like the H-1B visa program--which is used by offshore IT service providers to import skilled labor--are expected to face reform. Jeff Session, the nominee for U.S. attorney general, has been vocal about reforming visa regulation, while a bill introduced to the House of Representatives by Democratic Rep. Zoe Lofgren of California aims to raise the minimum H-1B salary from $60,000 to $130,000. While there has been much discussion by both sides, the extent of the finalized legislation and its passing remains unclear.

At this stage, we recognize the risks associated with higher costs that could pressure both revenue and operating margins for several IT services leaders. However, we believe there are some important factors to consider, such as outsourcing, automation, local mergers and acquisitions, rolling H-1B visas, and political pressure, that may help to alleviate long-term pain for providers whose business models rely on help from legal immigration. Despite the near-term uncertainty, our long-term opinion of the industry is unchanged, and  Cognizant Technology Solutions (CTSH) remains our favored undervalued name. We are maintaining our fair value estimates and narrow moat ratings for Cognizant,  Infosys (INFY),  Tata Consultancy Services (TCS), and  Wipro (WIT).

Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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