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Investing.com -- Bernstein analysts in a note dated Wednesday have initiated coverage on Sopra Steria with an "outperform" rating, signaling confidence in the company despite recent challenges.
Shares of the IT company were up 6.4% at 08:10 ET (13:10 GMT).
The investment case hinges on the belief that the stock is undervalued and that concerns over its growth prospects are overblown. The analysts set a price target of €231, representing a potential 55% upside from current levels.
Sopra Steria has faced investor skepticism due to two consecutive years of stagnation in revenue growth (2024 and 2025 estimated) and a projected decline in the first quarter of 2025.
However, Bernstein analysts argue that these fears are exaggerated and that the stock is trading at historically low valuation multiples.
The brokerage flags that similar market overreactions in 2003, 2009, and 2020 were followed by strong rebounds, and they anticipate a similar trajectory this time.
Despite short-term headwinds, Bernstein remains bullish on the European IT services sector, asserting that it is poised to outpace GDP growth.
They argue that Sopra Steria is well-positioned to benefit from this trend, given its business mix and pricing power.
The recent decision by management to provide specific guidance for Q1 2025, which is rare for the company, is seen as a step toward de-risking near-term expectations.
The brokerage identifies several catalysts that could drive a re-rating of the stock. These include the dissipation of organic sales growth headwinds from Q2 2025, a stronger pipeline of contract signings, and potential extensions of major contracts in the UK.
Bernstein suggests that the current market sentiment is overly pessimistic, as evidenced by the company’s deeply depressed valuation metrics—trading at 6.6 times estimated 2025 EBIT and offering a free cash flow yield of 9.4%.
While concerns over Sopra Steria’s growth have led to significant stock underperformance, Bernstein sees this as an opportunity rather than a red flag.
They argue that the company’s fundamentals remain strong, and the IT services industry as a whole is set for a rebound.
The analysts suggest that while many IT services stocks are trading below fair value, Sopra Steria’s valuation discount is particularly pronounced and unwarranted, given its business stability and long-term potential.
Ultimately, Bernstein’s analysis frames Sopra Steria as a high-quality IT services provider that has been unfairly punished by the market.
The stock’s current valuation suggests that investors are pricing in perpetual negative growth, which the analysts deem unrealistic.
If the company’s performance aligns with Bernstein’s expectations, the stock has upside potential, with downside risks appearing limited in comparison.