By: Yiqiu
Zhu, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is mentioned
in this article.
Summary
• Infosys Ltd. (NYSE:INFY) is a global leader in consulting,
technology, outsourcing, and next-generation service. The company, along with
all its subsidiaries, provides Business IT service, consulting and system
integration service, Business Platform innovation, and emerging technology.
• Infosys had a really good run
over the past two years, the stock reached its all-time high of $20.47 on April
15th 2016.
• Due to the potential impact
from Brexit and missing the earnings target in Q1 2017, Infosys’s stock dropped
from $20.47 per share to $15.6 per share.
• Infosys lowered its revenue
growth target in the year ending on March 31st, 2017 from a target
growth between 11.5% and 13.5% in constant currency term to a target growth
between 10.5% and 12%.
• Market might be overacting to
the event that happened to Infosys, the stock could have the potential to rise
back to $19 per share depend on Q2 and Q3 earnings results.
Key
points: The market has a very negative reaction on Infosys missing its
earnings estimates for Q1 2017. The company’s stock dropped more than 9% on
July 15th. This big drop in stock price is just a result of many
problems that Infosys is facing right now.
When Dr. Sikka joined Infosys
in 2014, he set up an ambitious target that he will turn Infosys into a $20
billion firm by 2021. In the beginning, Infosys did have very good growth in
revenue and it had been continuously beating the earnings estimates for three
quarters. As a result, the stock is in an upward trend since 2014 and reaches
its all-time high of $20.47 on April 11th 2016.
However, after April 16th
2016, the market condition became worse for Infosys. First, Infosys’ chief
operating officer said spending by clients remains volatile and may hurt the
company’s margin in the short term.
Second, Britain’s vote to exit
the European Union leaves Infosys with little visibility to the company’s
future performance because 23% of Infosys’ revenue comes from Europe. Infosys’
CEO Vishal Sikka said that: “In the near term, we don’t know how Brexit will
affect us and so forth”.
As a result of missing the
earnings result, volatile client spending, and Britain exits EU, Infosys
lowered its revenue growth target in the year ending on March 31st, 2017 from a
target growth between 11.5% and 13.5% in constant currency term to a target
growth between 10.5% and 12%.
After all that happened to
Infosys, the market starts to worry if Mr. Sikka, CEO of Infosys, is just too
optimistic about Infosys’ future and set up a goal that is above Infosys’
ability to achieve.
What
has the stock done lately?
Infosys has been in a downward
trend since June 2016. The stock dropped from &19.71 per share (on June 6th
2016) to $15.6 dollar per share (on October 7th 2016), a 20% drop in
four months. Missing the earning for Q1 2017 and lowering its revenue guidance
for FY 2017 are the main reason for the decline in stock price.
Past
Year Performance: Infosys has decreased 12.75% in value over the
past year. The highest point over the past year is $20.47 per share and the
stock currently is at the lowest point over the past year ($15.6/Share). Based
on the price performance, it is clear that the market thinks Infosys’ does not
worth more than $20 per share under current economic condition.
Infosys
1-YR chart Source: FactSet
My
Takeaway
I think Infosys’ stock price
gets beaten down too much recently with all the unfavorable conditions in the
market. Many people worried that the volatile client spending would not only
hurt Infosys in short term but also hurt the company in the long term, however,
we have to keep in mind that the global IT market up 6% in 2015 and it is
estimated to keep the growth momentum in 2016. Also, people worried about
Brexit might have negative impact on Infosys.
It is true that Brexit will hurt
Infosys’ revenue, but Infosys only has 23% of the revenue comes from Europe,
which is the lowest among Indian IT giants. Infosys should be the one that is
least affected by Brexit. Therefore, I think market slightly overreacted to the
events that happened to Infosys. Moreover, If Infosys’ Q2 and Q3 earnings
results turn out to be better than what market expects, the company’s stock
could have the potential to bounce back to $19 per share.
