Infosys (NYSE: INFY) is an emergent player in AI for several reasons, including its impact on operations, potential client offerings, and demand for services from businesses looking to capitalize on it. The problem in 2023 is that this business services company did not see the boost from AI as soon as hoped, but that story is changing. 

Infosys is struggling to produce growth in F2024, but that fiscal period will soon end, and the picture will brighten next year. The outlook for F2025, which begins in CQ2 2024, is a return to growth that the current consensus underestimates. The company is in a good position to grow organically and has been investing in growth, announcing its latest acquisition with the FQ3 2024 earnings release. As it is, analysts expect revenue to grow by 7% in the next fiscal year and earnings by 9%. 

Steady, stable, diversified Infosys invests in the future 

The primary takeaway from Infosys’ Q3 report is that its diversified offerings provide a foundation for steady, stable results in uncertain times. The company’s revenue of $4.66 billion is flat compared to last year but as expected due to offsetting results segmentally. 

Three of the seven operating segments were down YOY, led by a 10% decline in Communications, but four produced growth. Growth was led by Manufacturing’s 10% gain, followed by an 8.2% increase in Life Sciences. Life Sciences should be an area of strength throughout the calendar year due to an expected rebound in the sector. Regionally, the EU and ROW were strongest, growing 5% and 7.8%, respectively, while North America and India both contracted. 

The margin was also as expected, with the gross margin down due to higher input costs but offset by lower SG&A. The takeaway is that GAAP earnings are down 7% YOY despite the topline stability but align with the forecast and provide no reason to sell the stock. The $0.18 in GAAP earnings is as expected and came with stable guidance. The revenue guidance was narrowed by 50 basis points at both ends of the range to 1.5% to 2% growth for the fiscal year. This aligns with the analysts' forecasts, and earnings guidance is the same. 

Among the highlights of the report is the acquisition of InSemi. The company announced a definitive agreement to acquire the semiconductor design firm for an undisclosed amount. The deal is set to close in the current quarter and expands Infosys' reach into engineering R&D. The initial boost to revenue will be small. Still, there are opportunities for Infosys, including scaling the business and cross-selling, which will help support growth over the long term. 

Globally diversified Infosys is a good play on emerging markets

Economists are mixed on the outlook for recession but generally agree global GDP growth will decelerate in 2024. The bad news is that deceleration will be seen most in the US, which is forecast to grow at a tepid 0.9% pace, less than half the global forecast, with most of the gains made in the emerging markets. Emerging markets are expected to grow at 4X the US pace, nearly double the world's pace, led by names like India, good news for Infosys. Its US-centric revenue is nearly 60% from North America, but that is expected to change as EMs develop, and 2024 will be a pivotal year for many economies as their middle classes expand. 

The analysts' activity is mixed, but a significant shift began in the first week 2024. Two analysts, UBS Group (NYSE: UBS) and JPMorgan Chase (NYSE: JPM), upgraded the stock, and JPM made it double from Neutral to Overweight compared to the broad consensus of Hold. They did not issue price targets, but the consensus of 49 targets issued over the past year has this stock trading marginally higher. If the analysts continue to upgrade and lift their targets, they could lead this market into a full reversal. 

The technical outlook: INFY is at a critical turning point

The price action in INFY is up following the release and at a critical turning point. That point is near the $19 level and the 1-year high. If the market moves above this level, it could continue to advance with $20 as the next target. The $20 level may cap gains until evidence of growth is seen in the results. Until then, Infosys’ 2.5% dividend appears reliable and may grow in 2024.