Infosys Adds New AI Client: How Should Investors Play the Stock?

Infosys INFY shares have gained 23.4% year to date, outperforming the Zacks Computer and Technology Sector and S&P 500 index’s return of 22.4% and 19.7%, respectively.

INFY stock has also outperformed the Zacks Computers – IT Services industry’s return of 7.2% in the same time frame. The outperformance reflects investors’ confidence in Infosys’ fundamentals and growing client base.

Recently, Infosys expanded its client base with a top European delivery and logistics company, Posti. INFY will utilize its artificial intelligence (AI) expertise to improve Posti’s customer experience and operational efficiency.

This new seven-year project develops upon their longstanding relationship in which INFY enhanced Posti’s information technology (IT) infrastructure. In this new project, INFY will leverage Infosys Topaz and Cobalt to deploy AI-based solutions through a cloud environment. This upgrade in Posti’s IT architecture has the potential to place Posti in the top tier of the logistics business.

So far this year, INFY has gained numerous clients who are interested in Infosys’ AI expertise. The list includes Metro Bank, LIC India, TDC Net, Roland-Garros, Telstra and First Abu Dhabi Bank.

Infosys YTD Performance

Image Source: Zacks Investment Research

INFY Vastly Invests in AI

Infosys is expanding its AI capabilities both organically and inorganically. INFY launched Aster at the beginning of 2024. The platform is powered by Infosys Topaz and uses Unreal Engine 3D, AR/VR/XR and CGI modeling to deliver an immersive experience. Infosys also gained ISO 42001:2023 certification for its AI management systems.

Its inorganic expansion comprised multiple acquisitions and collaborations. The acquisition of In Semi enhanced INFY’s R&D capabilities in the fields of AI, 5G, hyperconnectivity and high-performance computing. Infosys has collaborated with industry leaders, including NVIDIA NVDA, ServiceNow NOW and Intel INTC, to deliver solutions in AI.

Infosys collaborated with NVIDIA and combined its Topaz with the latter’s NIMs to deliver TOSCA Network Service Design, one generative AI-powered smart networking operating center and Infosys Cortex.

ServiceNow and Infosys developed a solution by combining the Now Platform and the Infosys Enterprise Service Management Cafe to boost enterprise business services. Infosys collaborated with Intel to integrate Intel Xeon processors, Intel Gaudi accelerators and Intel Core Ultra Processors to improve the performance of Topaz.

Infosys Faces Macroeconomic Headwinds

Infosys’ near-term prospects might be hurt by softening IT spending amid macroeconomic headwinds. The rising inflation has been a major challenge for the company due to expense reduction among its enterprise customers. Digital transformation projects, being discretionary expenses for companies, are experiencing a slowdown, affecting INFY’s revenues.

Over the past few quarters, Infosys’ revenue growth rate has decelerated to a low-to-mid single-digit percentage range from a double-digit percentage rate till fiscal 2023.The Zacks Consensus Estimate for INFY’s 2025 revenues is pegged at $19.3 billion, indicating year-over-year growth of 3.7%.

Additionally, Infosys’ business is highly prone to currency volatility between the Indian Rupee and the U.S. dollar, as the majority of its revenues are derived from the U.S. markets.

Conclusion

INFY’s steady flow of contracts and expanding AI expertise reflects solid top-line growth potential. However, the stock has a stretched valuation as reflected by the Zacks Value Score of F, suggesting that investors should wait for a better entry time. Infosys currently carries a Zacks Rank #3 (Hold), You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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