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We’ve lowered our Morningstar Economic Moat Ratings for five IT services companies after reviewing artificial intelligence’s potential disruption of the global technology sector.
Why it matters: The recent Claude Cowork and OpenAI Codex announcements show generative AI’s potential to change knowledge-based work. Areas where IT consultants provide services are under threat, such as application development and business process outsourcing.
- We expect IT services firms to see AI headwinds from the loss of billable hours due to software engineering efficiency gains and AI-native systems’ gradual replacement of offshore labor across key BPO workflows.
- On the other hand, AI can bring tailwinds as IT consultants experience a higher volume of work when clients upgrade infrastructure to prepare for organization-wide AI deployments. A transition to fixed-price or outcome-based pricing models can also mitigate the reduction of billable hours.
The bottom line: We lower our moat ratings for Accenture and Infosys to narrow from wide. We lower our moat ratings for Wipro and EPAM Systems to none from narrow.
- We also reduce our fair value estimates for Accenture to $255 per share from $272, for Infosys to $16.70 from $18.50, for Wipro to $2.10 from $2.30, and for EPAM to $149 from $153.
Big picture: Our top picks in IT services are Accenture (19% undervalued), Cognizant (22% undervalued), and IBM (21% undervalued). These companies have the most comprehensive AI-related offerings, earning them a front seat to assist with customers’ IT needs in the AI era.
- For these stocks to move toward our fair value estimates, we need to see AI-induced demand boosting top-line growth. While we are confident that the boost will come eventually, the timing remains highly uncertain.
Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
The author or authors do not own shares in any securities mentioned in this article.
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