Amdocs Limited (NASDAQ:DOX): A Bearish Investment Perspective

We came across a bearish thesis on Amdocs Limited (NASDAQ:DOX) on ValueInvestorsClub by SherloxAM. In this article, we will summarize the bears’ thesis on DOX. The company’s shares were trading at $87.00 when this thesis was published, vs. the closing price of $87.74 on Feb 27.

A clinical medical professional helping a patient while using an integrated health information technology software.

DOX provides software and services to communications, entertainment, and media service providers worldwide. It also designs, develops, operates, implements, supports, and markets open and modular cloud portfolios.

Analysts have relied on FCF guidance for measuring the performance of DOX and recent results have been disappointing. The company missed its 2024 FCF guidance even though it was reduced from $750 million to $700 million. While the management has attributed this to expenses arising out of restructuring and layoffs, the 2025 guidance forecasts $710-730 million FCF but this may be difficult to achieve with more restructuring in the pipeline.

The sustainability of its cash flow from its regular business is also questionable given the over-reliance on balance sheet management to generate cash flows. The supplier payment days have increased from 11 to 22, increasing cash flows by $162 million (26%). Average CAPEX in the last 10 years was 4% of sales but this can come down to 2.1% in 2024. Unbilled receivables have also been rising and could be a way to increase EPS. Intra-quarter borrowing has also been contributing to FCF (39%) but it has consistently added to the interest burden of DOX.

Its business model has also come under pressure since COVID with a moderation in mobile subscriber count and cost reduction initiatives by telecom companies. The 5G investments have also yielded below-par returns. As American and Canadian telcos continue to reduce costs, it is likely that IT companies like DOX will feel the heat. GenAI revenue is also not contributing much with average revenue per employee remaining flat in the last decade.

The upside is limited due to a slow growth in business and the intrinsic value stands at $40 if a 15x FCF multiple is taken into consideration. The potential downside stands at 55% of its current price.

While we acknowledge the potential of DOX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DOX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.