Morningstar | We Believe Cognizant Has a Narrow Economic Moat Because of Customer Switching Costs
Cognizant is a U.S.-headquartered IT services firm that has exemplified industry-leading growth for many years. With revenue growing at a significant rate over the past five years, Cognizant has become a notable competitor to industry incumbents. While we expect revenue growth to moderate from the heady days of five to 10 years ago, we think the firm can significantly outperform the overall global IT services industry, for which we ballpark as a mid-single-digit growth rate. Further investments in key industries, new geographies, global delivery, and social, mobile, analytics, and cloud technologies are expected to underlie such growth. In addition, the company has been successful in establishing close client relationships and is strategically well positioned via its digital business initiatives, which leads to a narrow economic moat and supports Cognizant's long-term relevance in the market.Cognizant’s client-first attitude has been the primary reason for its success. A differentiated balance between the consulting-centric incumbent operating model and the offshore industrial model that relies on lower-cost delivery allows the company to appear as either a U.S. or Indian firm as circumstances dictate. Furthermore, a digital business framework, which aligns Cognizant’s digital-related skills in business, operations, and systems & technology, provides clients with the appropriate tools and business partner to build out their long-term IT road map. We think this translates into significant customer switching costs.We believe Cognizant will grow in excess of the overall IT services market given a number of opportunities. A focus on emerging digital technologies is expected to create opportunities as clients rethink how to interact with their customers. Geographic expansion is expected to provide Cognizant with the opportunity to enter underpenetrated markets. Finally, developing depth in existing industries and expanding into new industries such as the public sector will provide additional growth avenues.Cognizant Technology Solutions is a services company, transforming customers' business, operating and technology models for the digital era. The company's services include digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services and business process services. Additionally, the company develops, licenses, implements and supports proprietary and third-party software products and platforms. The company has organized its services and solutions into four practice areas: Digital Business, Digital Operations, Digital Systems and Technology and Consulting.
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