Jefferies starts Grid Dynamics at Buy on AI fears easing

Jefferies initiated coverage on U.S. IT services firms, assigning a Buy rating and $11 price target to Grid Dynamics Holdings (GDYN), arguing that investor fears of AI disruption are overdone and have created an attractive valuation, with expectations for accelerated revenue growth and stable margins. Conversely, Unisys Corp (UIS) received a Hold rating and $4 price target, acknowledging encouraging turnaround signs such as rising bookings and reduced pension liabilities, but citing high execution risk and a need for more consistent progress before a higher multiple.

Analysis

Jefferies has initiated coverage on U.S. IT services firms, presenting a bifurcated outlook driven by the perceived impact of artificial intelligence. For Grid Dynamics Holdings (GDYN), the firm issued a Buy rating with an $11 price target, arguing that investor fears of AI disruption are exaggerated and have created a historically attractive valuation. Jefferies projects GDYN's revenue growth will accelerate from high single digits to low double digits by 2026 with stable to higher margins, supported by the fact that 23% of its revenue already stems from data and AI-related work growing at over 20% annually. This thesis posits that AI's immaturity will sustain demand for IT services expertise. In contrast, Unisys Corp (UIS) received a Hold rating and a $4 price target. While Jefferies notes encouraging signs in its turnaround, such as rising bookings and new customer wins against a steady $2 billion revenue base, it flags high execution risk. Positive steps, including a reduction in pension liabilities and a recent $700 million debt restructuring, are viewed as insufficient to warrant a higher multiple until more consistent progress is demonstrated.

Key Decisions for Investors

• Investors could consider Grid Dynamics (GDYN) as a potential investment to capitalize on what Jefferies sees as an overblown AI-related sell-off, given the company's strong existing AI revenue stream and projected growth acceleration.
• For Unisys (UIS), a wait-and-see approach is prudent; investors should monitor for sustained booking growth and margin improvement as evidence of a successful turnaround before committing capital, reflecting the 'Hold' rating and high execution risk.
• The contrasting ratings suggest a selective strategy within the IT services sector is warranted, favoring firms with demonstrated AI integration and growth like GDYN over legacy companies like UIS that are still in the early, high-risk stages of a turnaround.