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Cognizant Looks For Opportunties in the Machine Internet

Outsourcing company Cognizant Technology Solutions (NASDAQ:CTSH) has spent 2020 on the acquisition trail, looking for cloud service start-ups to replace its old data center business and give CTSH stock a boost.

Cognizant Technology Solutions logo on a corporate building
Source: JHVEPhoto / Shutterstock.com

Mostly it has been buying companies with links to Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Salesforce (NYSE:CRM). But its latest deal is aimed straight at what I call the Machine Internet.

The acquiree is Bright Wolf, a Durham, North Carolina company that automates factories. It connects sensors on machines to wireless networks that then feed decision-making software. Bright Wolf will become the hub of a Cognizant lab dedicated to industrial machine markets in the Research Triangle.

The Machine Internet

It’s easier to connect factories to the Machine Internet because they have one owner, and because the savings that result are obvious. Not only can sensors tell managers about production volumes and when machines need repair, they can help them figure out changes in production systems.

When several factories are connected in this way, it means top management knows precisely what its plants are up to.

In addition to factories, Bright Wolf works with larger systems like energy, transport, water and agriculture. Medicine is also a big niche, because hospitals are filled with machines and processes that need optimization. Hospitals also face constant demands to cut costs.

So far, most deals are under the radar, with costs undisclosed. The previous big deals in the space this year were Microsoft’s purchase of CyberX, focused on the security of industrial networks, and Dialog Semiconductor’s (OTCMKTS:DLGNF) purchase of Adesto.

The idea in all these cases is to create critical mass and expand into medicine and urban planning, where jobs are more public and complex.

Cognizant’s Dilemma

Cognizant began in 1998 and follows a “global delivery model.” While it’s based in Teaneck, New Jersey most of its employees are in India.

While the company grew rapidly in the 2000s, growth has been harder to come by in recent years, especially as the cloud has replaced data centers. Growth in 2019 was just 4%, and the company will be hard pressed to match its 2019 performance this year.

For the September quarter, Cognizant reported earnings of $348 million, 64 cents per share, on revenues of $4.2 billion. Revenues were flat, but earnings were down from 90 cents a year earlier. Operating margins narrowed from 17.3% to 15.9%. What Cognizant calls its “digital business,” mainly cloud, artificial intelligence and the Machine Internet, was up 42%.

Cognizant is not a big government contractor, but this summer it hired former General Services Administration official Anile Cheriyan, who will report directly to CEO Brian Humphries.

The shares only recently regained their pre-pandemic highs. This isn’t just due to the pandemic, but a series of internal problems.

These included an embarrassing “ransomware” attack targeting the company’s corporate credit cards. The company has also dealt with a bribery scandal in India aimed at loosening labor regulations. It also had to pay $52 million to former employees over its past work as a content moderator  for Facebook (NASDAQ:FB).

The Bottom Line on CTSH Stock

Companies like Cognizant know where the money is going.

It’s going to the cloud and it’s going to cloud applications. The Machine Internet is, for the most part, a cloud application.

What Cognizant is doing is what growth investors should be doing, seeking out new opportunities before they ripen. Cognizant’s purchase of Bright Wolf shows that the Machine Internet is one of those opportunities.

Cognizant itself has yet to feel renewed love from analysts, with a slight majority having it on their buy lists, and one shouting sell. It’s a stock you can wait for, but as the Machine Internet ripens it should, too.

At the time of publication, Dana Blankenhorn had long positions in AMZN and MSFT.

Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.

Article printed from InvestorPlace Media, https://investorplace.com/2020/10/ctsh-stock-cognizant-machine-internet/.

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