Cognizant Exceeds 2025 Guidance but 2026 Outlook Hints at Normalization

What happened

Cognizant reported Q4 and full-year 2025 results that exceeded its previously raised guidance, with revenue hitting $21.1 billion, up 7.0% year-over-year, and adjusted operating margin improving to 15.8%. Trailing bookings grew 5% to $28.4 billion, supported by 28 large deals, indicating robust demand conversion from its AI-led strategy. The company set 2026 guidance for constant currency revenue growth of 4.0% to 6.5%, a slight deceleration from 2025, with adjusted operating margin expected to expand 10 to 30 basis points to 15.9%-16.1%. Capital allocation remains aggressive, with plans to return $1.6 billion to shareholders via a 6.5% dividend hike and $1 billion in share repurchases. Despite the strong execution, valuation concerns persist as the stock trades well above intrinsic value estimates, keeping risks elevated in a competitive landscape.

Implication

Cognizant's ability to beat guidance and expand margins demonstrates operational discipline and effective large-deal execution, aligning with its AI-focused narrative. The bookings growth and sustained capital return provide near-term support, reducing downside risk from balance sheet strength. However, the 2026 revenue guidance implies a potential slowdown, possibly due to competitive pressures or plateauing AI adoption, which could challenge future acceleration. With the stock trading at a significant premium to intrinsic value, any misstep in bookings or margins could lead to a sharp correction. Investors should maintain a hold stance, monitoring bookings momentum and margin trends for signs of durable growth before considering an upgrade.

Thesis delta

The 2025 outperformance confirms execution strength and reduces near-term downside risks, slightly tilting the thesis towards the positive watch items in the DeepValue report. However, the guided deceleration in revenue growth for 2026 and persistent valuation overhang offset this, keeping the risk/reward balanced and the HOLD thesis unchanged.