India-based global IT consultant Infosys (NYSE:INFY) reported solid third-quarter results on Jan. 10 with revenues and profits increasing at a healthy rate. As a result, INFY stock gained more than 3% in early trading.
As I discussed in May, the IT consultant is in the second year of a three-year transformation that began in April 2018. At the heart of this transformation is the adaptation by the company of big-picture thinking. Instead of focusing on the next 6-12 months, CEO Salil Parekh believes shareholders will benefit significantly if the entire company focuses on building a business over the decade that’s far more relevant to its customers.
As part of my May article, I suggested that Infosys could hit $20 by the end of 2020 by expanding its digital portfolio. In particular, I was focused on the performance of Finacle, the company’s digital banking solution.
“Recently named a leading corporate banking solution provider by IDC Marketscape, Finacle provides a digital banking platform to Goldman Sachs’ (NYSE:GS) Marcus digital bank,” I wrote May 7, 2019. “With fintech continuing to be an essential part of financial services innovation and growth, Finacle could meaningfully boost Infosys’ results and Infosys stock.”
Since I uttered these words, Infosys stock has gained 6%, a decent return, but not the kind of performance the shareholders were hoping for.
Early in 2020, I wonder if INFY stock has the goods to get to $20.
The Latest Results
Across the board, Infosys’ results were positive.
On the top line, sales in the third quarter increased by 8.6% to $3.2 billion from $3.0 billion a year earlier. On the bottom line, its operating profit rose 5.3% in the quarter to $711 million. Farther down the income statement, its net profit rose 24.9% to $627 million.
The company’s largest segment, financial services, which include Finacle, saw revenues increase by 5.3% to $1 billion. The segment’s profit in the quarter was $262, 3.1% higher than a year earlier.
Overall, it had an operating margin of 21.9%, 70 basis points lower than in the same period a year ago. However, as I stated last May, Parekh is less interested in margins, and more concerned about meeting client expectations.
“Q3 results further underscore that we remain steadfast in our journey of sustained client relevance and deepening engagement with them, as they partner with us in navigating their next in the digital transformation era,” Parekh stated.
“For us, this has translated into double-digit growth year-to-date, leading to an increase in revenue guidance, accompanied by expanding operating margins.”
As part of its Q3 2020 press release, Infosys upped its revenue guidance to 10-10.5% growth from the previous expectation of 9-10% growth. Furthermore, in terms of large deals, Parekh emphasized that it grew these wins by 56% year-over-year.
In short, it continues to make progress on its transformation, which is excellent news.
But Can INFY Stock Hit $20?
Anything’s possible, I guess. However, I suspect that unless the company can ratchet up growth in the next 2-3 quarters by providing a catalyst or two for Infosys stock, 2021 is a likelier timeline.
Since Infosys listed its American depositary shares on Nasdaq in March 1999 — it switched to NYSE in 2012 — INFY stock has never gone higher than $12.08, which it did in August 2019.
To get to $20 over the next 12 months, both its price-to-sales and forward price-to-earnings multiples will have to increase. Currently, it trades at 3.7x sales and 17.2x earnings. The analyst estimate for fiscal 2021 earnings is 59 cents per ADS. Its revenue estimate is $13.9 billion.
Infosys ADS’ trade on a 1:1 basis with their shares listed in India. At the end of the third quarter, Infosys had 4.25 billion shares outstanding. Based on a $10.87 share price as I write this, it has a market cap of $46.2 billion.
To get to $20 a share, Infosys’ market cap would have to increase by 84% to $85 billion and the P/S and forward P/E multiples would have to double along with it.
That’s a bit of a stretch.
If you can hold for two to three years, I wouldn’t have a problem recommending Infosys stock at this point in its transformation. However, $15 is a more likely scenario in 2020.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
