On April 13, Infosys (INFY, Financial) reported financial results for its fourth quarter and full year of fiscal 2023, which ended on March 31. What is interesting is the divergence in the reaction to these financial results by the management of the company and the investors. Infosys’s stock tumbled 12% for the week ending on April 14, tanking 10% on the day of the earnings release, and now the year-to-date losses are 15.71%. The company stated that 2023 was a fiscal year with a strong performance, but it also provided a dreary outlook and also missed analysts' expectations for the fourth quarter of fiscal 2023.
Overall, I think that investors aren't panicking enough given the company's forecasts, which is rather unusual; normally the market overreacts, not underreacts. Investors looking to buy the dip on Infosys may want to think again in my opinion, as there could be further downside ahead.
An earnings miss behind and business risks ahead
First, let's take a look at the good news. "Our strong performance in FY23 is a testimony to the continued focus on digital, cloud, and automation capabilities which resonated with our clients. We have launched exciting programs with our clients leveraging generative AI platforms," said Salil Parekh, the company's CEO. He further added, "As the environment has changed, we see strong interest from our clients for efficiency, cost, and consolidation opportunities, resulting in a strong large deal pipeline. We have expanded our internal program on efficiency and cost to build a path to higher margins in the medium term. We continue to invest in our people and in supporting our clients."
However, Infosys missed Wall Street's earnings per share and revenue forecasts for the fourth quarter of 2023. Non-GAAP earnings per share came in at $0.18, missing expectations by $0.02, and the GAAP numbers were the same. Revenue was $4.58 billion, missing estimates by $149.20 million.
The company expects to post revenue growth of between 4% and 7% this fiscal year (which will end in March 2024), well below the average analyst estimate of 10.6%. The key points for this past fiscal year show a lot of positive trends, as revenues in constant currency terms grew by 15.4% year-over-year. Despite missing estimates, the company reported revenue growth of 11.7% year-over-year for the full fiscal year of 2023, while EPS came in at $0.71, up 1.3% year-over-year.
Infosys mentioned that there are key challenges ahead for its business which are posing severe threats. For example, clients have started to cut down on spending due to growing fears of a recession in several countries, and Parekh said, “While we saw some signs of stabilization in March, the environment remains uncertain... Some industries such as financial services in mortgages, asset management, investment banking, telecom, high-tech, and retail are more impacted, leading to uncertainty in spend and delays in decision-making. The U.S. is more impacted than Europe."
The company's margins are already struggling. The operating margin is trending lower, and free cash flow growth is negative. Specifically, the company reported an operating margin of 21.0% in fiscal 2023, a decline of 2.0% year-over-year, and free cash flow was $2.534 billion, a decline of 17.1% year-over-year.
The stock is not cheap on a relative valuation
On a relative valuation, the shares of Infosys seem to be expensive. The stock has a PEG ratio of 1.46, a forward enterprise-value-to-sales ratio of 3.49 and a forward price-sales ratio of 3.57. Compared to the Information Technology sector medians, the stock is now traded at a considerable premium.
The forward price-earnings ratio would be 20.51 based on analysts' estiamtes from Morningstar (MORN), but as mentioned above, the company itself has provided lower guidance. Thus, I would argue that the stock is actually overvalued now, as the market is still pricing it as if previous optimistic estimates were still in place.
Bottom fishing has an asymmetrical risk-reward
Infosys has a 52 week range of $15.06 to $20.93, meaning it is trading just above the 52 week low price. This may cause investors to consider buying the dip with the expectation of a strong rebound.
However, the stock may still be overpriced given the updated outlook. Even the technical analysis shows no signs of a bullish trend for now. The stock is well below its simple 50-day and 200-day moving averages currently, and the MACD indicator has turned negative. Interestingly enough, the stock price closed below the lower limit of its Bollinger bands.
Trying to pick a bottom in stock investing is like gambling; in most cases, the odds are against you. Stocks that are going down tend to be going down for a good reason, whether that reason be logical or fear-driven. Thus, I consider Infosys overvalued and unattractive as the challenges and warnings are too severe from a fundamental and technical analysis.
