Atos: Outsourcers strive to see through the cloud
For most investors today, technology and growth are synonymous. Traditional outsourcers are an exception to this rule. Their ability to transfer IT operations to low-cost economies once gave them an advantage. Now, customers are more interested in migrating data to the cloud, rather than migrating work to Bangalore.
French Act Already warned As this trend accelerates, this year’s results will be even lower. Sales will have nowhere to go. A lower profit margin means that operating profit should be reduced by at least one-tenth. Not surprisingly, its stock price has fallen by 17%.
Atos faces the same problems as other computing giants of the past. What to do when the competitive advantage disappears. CEO Elie Girard plans to reorganize, focusing on digitalization, cloud, security and decarbonization. His dilemma is to balance the growing Atos existing business with the shrinking legacy business.
Scale looks like a solution. The attempt to acquire DXC Technology in the United States was cancelled at the beginning of this year, and the accounting discrepancies were subsequently disclosed in April.
The proposed $10 billion transaction will more than double the workforce to 250,000. But investors reacted poorly to the prospect of defensive trading. When both companies encounter similar problems, cost reduction will only make you go further.
The setback has pushed Atos’ stock price to its lowest level since 2015, having fallen 30% this year. The current 7 times forward P/E ratio is hovering near the bottom of the historical range. It is in sharp contrast with local computing competitor Capgemini. Its stock price has risen by 30% this year, and its price-earnings ratio is 20 times.
Capgemini acquired Altran, an engineering consulting firm, for 3.6 billion euros last year, dispelling concerns that its legacy risks will cause a growth deficit. Leaning towards the interconnection industry is expected to provide plenty of new opportunities.
In order to have a chance to regain the favor, Atos must open a path to regain growth, which includes some risky diversification. The negligible net debt-the same as the ebitda expected this year-means it has the firepower to acquire. Otherwise, companies that are good at redistributing work processes from existing companies may suffer the same fate.
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