DXC has gotten torched over the last six months - since December 2024, its stock price has dropped 32.5% to $15.20 per share. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think DXC Will Underperform?
Even though the stock has become cheaper, we're cautious about DXC. Here are three reasons why you should be careful with DXC 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 4.4% 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. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for DXC, its EPS declined by 9.2% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Previous Growth Initiatives Haven’t Impressed
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 1.4%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.
Final Judgment
DXC doesn’t pass our quality test. Following the recent decline, the stock trades at 4.5× forward P/E (or $15.20 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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