A Soaring Tech Stock That You’ve Probably Never Heard Of
If you need any convincing that the technology sector is capable of delivering outsized profits, all you need to do is take a look at Conduent Inc (NASDAQ:CNDT).
The Florham Park, New Jersey-based business analytics and automation company is not a well-known stock by any means; it has a market capitalization under $1.0 billion at the time of this writing. Yet, in a recent single trading session, its share price skyrocketed 82.7%.
No, that’s not a misprint. On August 7—a rather uneventful Friday when the S&P 500 edged up 0.06%—this little-known tech stock managed to shoot through the roof.
The best part is, there is a good reason for the sudden increase of investor enthusiasm about Conduent stock.
Allow me to explain.
Conduent Inc, which came into existence as a spin-off of Xerox Holdings Corp (NYSE:XRX) in 2017, now operates through three main segments: “Commercial,” “Government,” and “Transportation.”
Even though it is a small-cap stock at the moment, the company delivers many mission-critical services and solutions to businesses and governments.
To give you an idea, 11 million workers use Conduent’s HR services and nearly nine million travelers use the company’s toll systems daily. (Source: “Conduent Reports Stronger than Expected Second Quarter 2020 Results with Significantly Increased New Business Signings,” Conduent Inc, August 6, 2020.)
At the same time, Conduent’s healthcare solutions help improve the experience of approximately two-thirds of all insured patients in the United States.
The main reason behind the massive single-day surge by CNDT stock was the company’s earnings report.
Conduent released its second-quarter results on August 6 after the closing bell. The report showed that the company generated $1.0 billion of revenue for the quarter, down 8.6% year-over-year.
Excluding non-recurring items, adjusted earnings from continuing operations came in at $0.12 per share, one cent lower than in the year-ago period.
Now, you are probably wondering how year-over-year declines in both top and bottom lines would spark a rally.
Well, the first reason is that, because of the impact from the COVID-19 pandemic, Wall Street expected Conduent Inc to report much bigger drops in its financials. In particular, the consensus estimate from analysts was that the company would earn $925.5 million of revenue and incur a loss of $0.05 per share in the second quarter.
In other words, the company handily beat Wall Street’s revenue estimate and surprised the market with a rather sizable adjusted profit.
The second reason is that revenue and earnings per share are not the only things that matter in a quarterly report. Investors are forward looking, and there is one number from Conduent Inc’s latest earnings release suggesting that the best could be yet to come for the company.
That number was the total contract value of new signings, which came in at $623.0 million for the quarter. The amount not only represented a whopping 90% increase year-over-year and 92% increase quarter-over-quarter, but also marked the strongest quarter for the company since its spin-off from Xerox.
Furthermore, the annual recurring revenue of newly signed contracts was $105.0 million, up 25% year-over-year and up 84% quarter-over-quarter.
Think about that for a second. A lot of businesses were closed in the second quarter, yet this company managed to sign a record-high number of new contracts during the challenging period. And those contracts will turn into a predictable revenue stream for the next few years.
Speaking of things that are predictable, we are still in the pandemic, and frankly, visibility is not all that great for most businesses. Conduent Inc, however, issued an outlook for the third quarter, projecting revenue of $960.0 million to $1.0 billion and an adjusted earnings before interest, tax, depreciation, and amortization margin of 10% to 11.5%.
Commenting on the guidance range, Chief Financial Officer Brian Webb-Walsh said, “These expectations are based on the current situation that we see today, but if COVID-19 impacts change significantly, it could push us towards the outer bounds of this range.” (Source: “Q2 2020 Earnings Call,” Conduent Inc, August 6, 2020.)
Conduent Inc (NASDAQ:CNDT) Stock Chart
Chart courtesy of StockCharts.com
Ultimately, what we are seeing here is really an example of how a “not as bad as expected” situation can turn into a massive opportunity.
Conduent stock plunged earlier this year due to concerns about COVID-19. But because the situation is not as bad as expected—as shown in the company’s latest earnings report—CNDT stock shot up in the trading session following the news release.
While we often see some pullbacks after a stock skyrockets, Conduent Inc’s strong fundamentals provide a good reason for its shares to continue traveling upward to pre-pandemic levels.