Cognizant’s outsourcing model
Elliott Management’s ownership in Cognizant (CTSH) was the primary reason for the recent 10% rise in the stock. But if we look at Cognizant’s stock price movement YTD (year-to-date) in 2016, we have to note that the stock has actually fallen 7% on that basis.
Defying pre-poll statistics, Donald Trump’s surprise election win had a dampening effect on Cognizant, as the company is focused on the high-growth and high-profit segments of its business consulting and business process outsourcing. The company is also eyeing the lucrative and disruptive cloud market to grow revenues in the long term.
Trump has criticized the US H1B visa program, which technology players often rely on to bring in cost-efficient talent from other countries. Given Trump’s anti-immigration policies and his views on H1B and J1 Visa restrictions, it’s clear that they will be bad news for the outsourcing industry.
In early November 2016, IBM (IBM) was accused by Donald Trump of depriving the United States of employment opportunities. Trump stated: “IBM laid off 500 workers in Minneapolis and moved their jobs to India and other countries. A Trump administration will stop the jobs from leaving America, and we will stop the jobs from leaving Minnesota.”
Trump’s visa restriction and anti-immigration policy
It’s important to note that Trump’s pre-election propositions on immigration and visa restrictions may not necessarily convert into proposed legislation. However, if his proposals do become legislation, they are expected to impact Cognizant’s bottom line significantly. Although Cognizant is US-based, a majority of its workforce is in India (EPI).
Bloomberg, citing James Friedman of Susquehanna International Group estimates, stated that if Cognizant’s allocation of H-1B visas is reduced by half, the company would have to bear $89 million of additional costs, and its EPS (earnings per share) would take an 11% hit.
The above chart shows that although Cognizant is poised to grow faster than its peers—namely, Accenture (ACN), Infosys (INFY), and India’s Tata Consultancy—its valuation is not growing at the same pace.