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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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