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Cognizant Tech (CTSH +3%) tacks on decent gains today after the WSJ reported on Friday after the close that Mantle Ridge, an activist firm, amassed an over $1.0 bln stake in the IT services and consulting company. Mantle Ridge has been active in CTSH for a few years, beginning to build its stake in the back half of 2022. A few months later, CTSH appointed a new CEO, Ravi Kumar, who successfully pivoted from stabilization to growth. This was most apparent in 2024 as the company's top line started with a 1.1% decline yr/yr in Q1, only to end with a 6.8% increase in Q4, its best quarter since 2Q22.

• As an IT consulting firm similar to Accenture (ACN) but considerably smaller, CTSH has taken advantage of the current cloud and AI shift unfolding across the business landscape. While its workers are predominately located in India, roughly three-quarters of its annual revenue is derived from the U.S. Similar to ACN, which has been adding AI specialists, CTSH has been investing in its workforce to ensure it capitalizes on supporting businesses' desire to implement digital and AI capabilities.
• CTSH is coming off an impressive year, with Q4 marking the high point for yr/yr large deal signings and bookings. The company's two largest segments, Health Sciences and Financial Services, led the way in Q4, with discretionary spending improving meaningfully in Financial Services. Large deals totaled ten in Q4, up from six in the year-ago period.
• A weak point from Q4 was its adjusted operating margins, which contracted by 40 bps yr/yr to 15.7%. Increased compensation costs were the leading factor in dragging down margins. On the bright side, margins did tick 40 bps higher sequentially in Q4, even as CTSH continues to invest in AI and M&A. CTSH also anticipates around 20-40 bps of margin expansion in FY25, with the growing adoption of AI to drive better productivity and even higher margins over time.
• Speaking of AI, CTSH believes its Gen AI capabilities are gaining momentum, noting that at the end of Q4, it boasted over 1,200 early Gen AI engagements compared to 1,000 at the end of Q3. Management sees demand for AI services expanding across industries as use cases proliferate, citing potential examples of predictive analytics, drug discovery in health care, and credit scoring and fraud detection in financial services. Some of CTSH's current customers include Toyota (TM) and McDonald's (MCD).

In a world growing dependent on AI and cloud technologies, businesses may need to increasingly depend on IT consulting firms like CTSH to ensure they are not left behind. Interestingly, CTSH has already appreciated by +10% on the year when incorporating today's jump, which is far better than the approximately 5% drop incurred by ACN. Even though investors have been growing concerned about macroeconomic stability lately, CTSH has plenty to offer, potentially supporting a move back to all-time highs over the near term.