Analyst Note| Julie Bhusal Sharma |
Infosys’ first quarter was sound, as the company surpassed our top-line assumptions from further digital transformation demand while coming in just slightly over our EPS assumptions. While maintained its full-year expectations for operating margins, it boosted its forecast for revenue growth by 200 basis points. The update has boosted our confidence, leading us to increase our fair value estimate for narrow-moat Infosys to $11.90 from $11.20 per share. Shares are up 2% after results to nearly $21.50, leaving the stock in 1-star territory. As a reminder, we view other Indian IT services names Tata Consultancy and Wipro as significantly overvalued as well. IT services stocks have skyrocketed, with Infosys’ stock having doubled in the last year alone. The pandemic has brought significant tailwinds to the industry, such as accelerated digital transformation demand, but that has also come with headwinds, such as scarce labor. Not to mention, we believe a significant portion of the IT services market growing includes managed infrastructure from new workloads enabled by the cloud, which we think will favor cloud service providers like Amazon and Microsoft.