Infosys Is Ready To Scale New Highs

Infosys Beats And Raises As Transformation Takes Hold 

Infosys NYSE: INFY has been working hard on a digital transformation that just so happened to set the company up perfectly for the pandemic and the post-pandemic world. A consulting and outsourcing firm, Infosys’ transformation is centered on digital and includes “re-skilling” its talent pool, investing in new talent, investing in technology, and making itself a business-services company of the future, not the past. Needless to say, those efforts are paying off and are being aided by tailwinds that do not appear to be slacking. Assuming the market follows through on its post-earnings release action, we see this stock not only breaking out to a new high but trending higher for the foreseeable future. 

A Strong Quarter For Infosys 

Infosys had a strong quarter any which way you look at it. The company reported $4.25 billion in net revenue for a gain of 20.9% over last year and last year’s revenue grew by 8%. The gains are the fourth consecutive quarter of accelerating growth and beat the Marketbeat.com consensus estimate by 265 basis points. This makes the 4th quarter of accelerating growth and there there is growth forecast for the coming quarter and year as well. Internally, revenue growth was driven by the digital channels which increased by 42% to 58.5% of the net so yes, the transformation strategy is working. 

Moving down the report, the company experienced some margin contraction due to rising costs and investment in personnel but less than what was expected. The operating margin contracted 190 basis points to a still-healthy 23.5% and drove solid results on the bottom line. The GAAP $0.18 is up a penny from last year or about 5.9% and beat the consensus by a penny as well. 

Looking forward, the guidance is positive and expecting strength to carry into the current quarter at least. The company signed $2.53 billion in new deals during the quarter which should help drive YOY growth of 19.5% to 20% versus the previous 16.5% to 17.5% predicted at the end of last quarter. In our view, the rise of Omicron is only going to accelerate the company’s business so there is an upside risk to the new guidance. 

The Sell-Side Is Giving Mixed Signals About Infosys

The sell-side has some interest in Infosys but the signals we’re getting are mixed. On the one hand, the Marketbeat.com consensus rating is a Hold and net institutional activity is bearish but the price target keeps rising. The consensus price target is up more than 100% in the last year and 20% in the last 30 days alone while net institutional buying is negative to the tune of $0.27 billion. That’s about 2.5% of the market cap with shares trading at the all-time highs but, so far, is not enough to cap gains. In our view, the institutions own a relatively small 15.75% of the company and aren’t a driving force in this market, at least not now. 

The Technical Outlook: Infosys Is Ready To Break Out 

Shares of Infosys gapped up more than 1% in the wake of the guidance update and opened just below the current all-time high. Price action is struggling with resistance at this time but, so far, has closed the gap and confirmed support at the previous close and above the short-term moving average. The indicators are in favor of an upward movement in the stock so we are optimistic a new all-time high will be set. Assuming the market is able to move and close above the $1915 level we see this stock moving up to $2,000 and $2,100 in the next two to three months.