J.P. Morgan upgrades Cognizant and CI&T, downgrades Endava on sector review

Investing.com -- J.P. Morgan has shifted its outlook on key IT services firms, upgrading Cognizant Technology Solutions (NASDAQ:CTSH) and CI&T to “overweight” from “neutral,” while downgrading Endava (NYSE:DAVA) to “neutral” from “overweight,” in a note dated Monday.

The ratings changes follow the bank’s Global Technology, Media and Communications (TMC) Conference held in Boston last week and a broader review of first-quarter earnings.

The brokerage cited mixed performance across the sector, with Cognizant  and EPAM reporting relatively strong results, while Globant and Endava came in below expectations. 

Despite select gains, the broader industry continues to experience a prolonged stretch of below-average organic revenue growth. 

According to J.P. Morgan’s updated IT Services revenue growth index, the sector is expected to post 2.1% FX-neutral organic growth in 2025, well below the 20-year median of 5%.

“CTSH, EPAM, CINT, GDYN and KD results were generally better than feared,” analysts said, while noting that DXC Technology Company (NYSE:DXC), Endava and Globant faced estimate revisions and sharp stock reactions.

Large-scale cost-focused transformation projects continue to provide the main revenue stream in a market that remains hesitant on discretionary IT spending. 

According to J.P. Morgan, companies such as Cognizant and Kyndryl have secured major deals related to cloud migration, data modernization and legacy system efficiency. 

At the Boston conference, Cognizant disclosed a new mega deal exceeding $500M in total contract value, underscoring its positioning in cost-cutting projects.

CI&T, along with Grid Dynamics, is projected to be among the fastest-growing digital IT services firms this year, with expected double-digit growth. J.P. Morgan noted that CI&T’s valuation at 18x NTM PE is in line with peers despite its stronger growth prospects, prompting the upgrade to “overweight.”

Cognizant, which now shows FX-neutral organic growth in the range of 2.5% to 3%, is also gaining momentum, closing the performance gap with larger rivals such as Accenture (NYSE:ACN), Infosys (NSE:INFY) and Tata Consultancy Services (NSE:TCS). 

J.P. Morgan sees this as a catalyst for Cognizant’s valuation to improve from its current 16x NTM PE compared to the peer group’s 23x–25x range.

Meanwhile, Endava is projected to see a 3.5% decline in FX-neutral organic growth this year. 

Despite trading at a low 10x NTM PE multiple, the firm’s weaker demand outlook led to a downgrade.

Discretionary IT spending remains subdued, though firms are beginning to see early traction in AI-related projects focused on productivity and data modernization. 

Still, J.P. Morgan does not expect a significant recovery in short-cycle work in 2025, revising its IT services index forecast down by 40 basis points to 2.1%.

Artificial intelligence remains a positive force for the sector. Companies like Accenture, EPAM Systems, Cognizant, and CI&T are beginning to see growth contributions from AI-enabled solutions.

Accenture reported that AI now represents 3% of revenue and contributed 175 basis points to year-over-year growth in the first half of its fiscal year.

J.P. Morgan remains cautious on certain verticals and regions. Retail, consumer goods and manufacturing sectors are facing headwinds due to tariff-related uncertainty. 

LatAm, flagged by Globant as a weak spot, also drew concern given Accenture’s 4% exposure in the region. 

U.S. Federal Services remain under pressure, particularly affecting firms like Accenture, which has 8% revenue exposure.