Persistent Systems Investors Should Look Beyond AI Hype as New Acquisition Hits Stocks High

Persistent Systems’ stock rose over 3% on Thursday, hitting a new 52-week high of ₹4,760. The company’s subsidiary recently announced the acquisition of US-based Starfish Associates, LLC for $20.7 million. Starfish offers enterprise communication solutions, which will enhance Persistent’s AI capabilities and expand its client base among Fortune 500 companies.

ICICI Securities Ltd noted that this acquisition is expected to boost Persistent’s earnings per share. However, the impact will depend on how quickly Starfish is integrated and its contribution to earnings. Persistent has a history of acquisitions, having bought eight companies in the last five years, spending $260.5 million to gain $123.13 million in revenues at the time of acquisition.

While the AI aspect of this acquisition is getting attention, it’s essential to recognize that Starfish is a relatively small addition. The upcoming Q1 FY25 earnings and demand outlook will be crucial. In Q4 FY24, Persistent’s management highlighted ongoing macroeconomic challenges. The company aims for a $2 billion revenue run-rate by FY27 and plans to improve its earnings before interest and tax (EBIT) margin by 200-300 basis points over the next two to three years.

Motilal Oswal Financial Services predicts Persistent will lead mid-tier IT companies with 5% revenue growth in Q1 FY25, driven by healthcare deals. However, EBIT margins may shrink by 50 basis points due to initial costs of large deals.

Persistent’s shares have increased by 29% in 2024, outperforming the Nifty IT index. The stock trades at 43 times estimated FY26 earnings, reflecting its better revenue growth compared to tier-1 IT peers. Nevertheless, sustained demand is essential for continued earnings growth.