Persistent Systems Investors Should Look Beyond AI Hype as New Acquisitions Hit Stock Market Highs

Persistent Systems shares rose more than 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 communications solutions that will enhance Persistent’s AI capabilities and expand its customer base among Fortune 500 companies.

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

While the AI ​​aspect of this acquisition is eye-catching, it’s important to recognize that Starfish is a relatively small addition. Upcoming earnings and demand guidance for Q1 FY25 will be key. In Q4 FY24, Persistent’s management highlighted ongoing macroeconomic challenges. The company is targeting $2 billion in revenue by FY27 and plans to improve earnings before interest and tax (EBIT) margin by 200-300 basis points over the next two to three years.

Motilal Oswal Financial Services expects Persistent to lead the mid-market IT market with 5% revenue growth in Q1 FY25, driven by healthcare deals. However, EBIT margins could contract by 50 basis points due to upfront costs of large deals.

Persistent stock is up 29% in FY24, outperforming the Nifty IT index. The stock is trading at 43 times FY26 estimated earnings, reflecting better revenue growth compared to its A-list IT peers. However, steady demand is essential for continued earnings growth.