DXC currently trades at $13.59 per share and has shown little upside over the past six months, posting a small loss of 2.4%. The stock also fell short of the S&P 500’s 6% gain during that period.
Is now the time to buy DXC, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think DXC Will Underperform?
We're cautious about DXC. Here are three reasons why DXC doesn't excite us and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
We can better understand IT Services & Consulting companies by analyzing their organic revenue. This metric gives visibility into DXC’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, DXC’s organic revenue averaged 4.2% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests DXC might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect DXC’s revenue to drop by 1.9%. Although this projection is better than its two-year trend, it’s hard to get excited about a company that is struggling with demand.
3. Previous Growth Initiatives Haven’t Paid Off Yet
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
DXC historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
Final Judgment
We see the value of companies helping their customers, but in the case of DXC, we’re out. With its shares trailing the market in recent months, the stock trades at 4.3× forward P/E (or $13.59 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
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