The Top Is In For Infosys

Infosys Growth Is Priced In 

Infosys NYSE: INFY is still growing, it’s still making profits, and it’s still on track to pay a higher dividend than it did last year but the market for the stock has peaked. This is because the growth is more than priced in and sell-side support is waning. In this paradigm, we can expect to see the analysts and institutions add more weight to share prices and possibly turn this top into a full reversal. Trading at 27X its earnings with earnings growth slowing a dividend below 2.0% there is really no reason to be excited about this stock and, if you already own it, plenty of reasons to take profits and move that money somewhere else. 

Infosys Produces Weak Quarter, Guidance Is Weak Too 

Infosys did not have a bad quarter but when it comes to the market it isn’t so much how a company performs but how it performs relative to expectations. When it comes to performance, Infosys, grew revenue by 18.6% YOY to $4.28 billion. When it comes to performance relative to the analyst's expectations the figure is only as expected which was no catalyst for share prices, especially when coupled with weak guidance. Internally, the company’s transition to digital and cloud-based services continues to drive success. Digital revenue increased to 59.2% of the net on a 38.8% CC increase. 

Moving down, the company reported margin contraction which was expected as well, the good news is that margin contraction was only as expected with the operating margin down 300 basis points to 21.5%. This contributed to a 480 basis point decline in FCF and only 12.5% growth on the bottom line. On the bottom line, the $0.18 in GAAP earnings is up YOY but again, provided no catalyst for share prices and there is the guidance to consider as well. 

As for the guidance, the company is expecting to see FY revenue growth in the range of 13% to 15% which is good, but it compares poorly to the analyst consensus which is bad. Worse, the company is not predicting any substantial improvement in the operating margin which leaves the outlook for EPS below consensus as well. In both cases, the guidance is not providing a catalyst for share prices either. 

Analysts Sentiment Wanes, Institutions Shed Infosys 

The institutional activity in Infosys is more or less balanced over the past 12 months but has been tilted in favor of the bears for the last 6. The institutions have been net sellers for the last two quarters shedding about $0.01 billion or about 0.02% of the stock, no large amount, but a headwind nonetheless. And the institutions don’t hold much, only about 15.5%, so there is no underlying base of support ready to hold up prices should they begin to fall. In regards to the analysts, the Marketbeat.com consensus slipped to a firm Hold from Buy over the past year and the price target is falling too. The consensus price target is still 20% above the recent price action but it is down in the 3-mont and 1-month comparison and moving lower in the wake of the guidance update. 

The Technical Outlook: Infosys Topped, A Reversal May Come Next 

The price of Infosys more than tripled in the wake of the pandemic so it is no surprise to see some topping action now. The weekly chart shows a clear Double Top that has the stock in a trading range and in danger of reversal. Key support is at the $1675 level, a break below there would be bearish. Assuming the market does fall below this level, we see price action moving down to $1400 or lower. If price action can maintain support above $1675, we see this stock moving sideways within its current range until something changes in the outlook.