Is Cognizant (CTSH) a Buy Ahead of Strong Q3 Guidance and AI-Driven Growth?

Cognizant Technology Solutions (CTSH) has emerged as a focal point in the IT services sector, driven by its robust Q2 2025 performance and aggressive AI strategy. The company reported non-GAAP earnings of $1.31 per share, exceeding estimates by 3.97% and marking a 12% year-over-year increase [1]. Revenue surged 8.1% to $5.25 billion, fueled by the Belcan acquisition, which added 400 basis points of inorganic growth, particularly in the Products & Resources segment [1]. These results underscore Cognizant’s ability to navigate macroeconomic headwinds while maintaining operational momentum.

The company’s bookings and book-to-bill ratio further reinforce its growth trajectory. Trailing 12-month bookings hit $27.8 billion, a 6% year-over-year increase, with a 1.4x book-to-bill ratio indicating strong demand for its services [3]. In Q2 alone, bookings grew 18% year-over-year, driven by six large deals, including two mega contracts exceeding $1 billion each [2]. This pipeline suggests Cognizant’s value proposition is resonating with clients, particularly in high-growth areas like generative AI and digital transformation.

However, Cognizant’s subpar Growth Score of D—a metric reflecting its ability to sustain long-term revenue expansion—raises questions about its future potential [1]. This contrasts with its improving Momentum Score of B and a strong Value Style Score of B, which position it in the top 40% for value-based investing strategies [2]. The disconnect between operational performance and stock price momentum highlights a potential mispricing. Analysts project a forward P/E ratio of 13.59, significantly below the sector average, suggesting undervaluation despite the company’s strategic investments [5].

Cognizant’s AI-driven transformation is central to its long-term strategy. The company has committed $1 billion to generative AI initiatives over three years, including partnerships with Microsoft to leverage Copilot and other tools [4]. Additionally, it plans to hire 15,000–20,000 employees in 2025 and deploy 1,000 context engineers to advance agentic AI [2]. These moves signal a proactive approach to future-proofing its business in an AI-centric world.

Strategic wage hikes and shareholder returns also bolster the investment case. Cognizant is raising salaries for 80% of its employees, effective November 1, 2025, without resorting to layoffs—a departure from peers and a step toward reducing its 15.9% attrition rate [1]. The company also plans to return $2 billion to shareholders through dividends and buybacks in 2025 [5]. Such measures balance cost control with talent retention, addressing a critical vulnerability in the IT services sector.

Analyst sentiment is mixed but cautiously optimistic. While some maintain a “Hold” rating with a $86.18 price target due to macroeconomic risks [3], others project a “Buy” rating with a $90.00 target, citing Cognizant’s AI-driven growth and valuation [4]. The company’s raised full-year revenue guidance of $20.7 billion to $21.1 billion and Q3 2025 revenue forecast of $5.27 billion to $5.35 billion further validate its momentum [1].

For value investors, Cognizant presents an intriguing opportunity. Its strong operating margins, AI investments, and disciplined capital allocation align with long-term value creation. While the D Growth Score reflects current limitations, the improving Momentum Score and robust bookings suggest the market may be underestimating its potential. As AI adoption accelerates and Cognizant executes on its strategic priorities, the stock could see a re-rating that bridges the gap between fundamentals and valuation.

Source:
[1] Cognizant Reports Second Quarter 2025 Results [https://www.prnewswire.com/news-releases/cognizant-reports-second-quarter-2025-results-302517804.html]
[2] Cognizant's Merit-Driven Pay Hike: A Strategic Bet on ... [https://www.ainvest.com/news/cognizant-merit-driven-pay-hike-strategic-bet-talent-growth-turbulent-sector-2508/]
[3] What Analyst Projections for Key Metrics Reveal About Cognizant [https://www.nasdaq.com/articles/what-analyst-projections-key-metrics-reveal-about-cognizant-ctsh-q2-earnings]
[4] Cognizant and Microsoft announce global partnership to ... [https://news.microsoft.com/source/2024/04/22/cognizant-and-microsoft-announce-global-partnership-to-expand-adoption-of-generative-ai-in-the-enterprise-and-drive-industry-transformation/]
[5] Here's Why Cognizant (CTSH) is a Strong Value Stock [https://finviz.com/news/143308/heres-why-cognizant-ctsh-is-a-strong-value-stock]