Wipro (WIT) Shares Fall -3.1% Today -- Is This a Bargain?

Data Processing Services company Wipro stunned Wall Street today as it plummeted to $4.36, marking a -3.1% change compared to the S&P 500 and the Nasdaq indices, which logged 1.0% and 2.0% respectively.

WIT currently sits within range of its analyst target price of $4.23, which implies that its price may remain stable for the near future.

Surprisingly, analysts give the stock an average rating of sell, which shows that they believe prices could continue to move. Over the last year, Wipro has lagged behind the S&P 500 by -29.0%, moving -35.7%.

Wipro's trailing 12 month P/E ratio is 17.4, based on its trailing EPS of $0.25. The company has a forward P/E ratio of 14.5 according to its forward EPS of $0.3 -- which is an estimate of what its earnings will look like in the next quarter. The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).

We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.

Wipro's PEG ratio of 2.0 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on WIT's margins:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2022-03-31 790,934,000 555,872,000 29.72 -6.19
2021-03-31 619,430,000 423,205,000 31.68 11.0
2020-03-31 610,232,000 436,085,000 28.54 n/a
  • Average gross margin: 30.0%
  • Average gross margin growth rate: 1.4%
  • Coefficient of variability (higher numbers indicating more instability): 5.3%

While not the strongest, Wipro's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.

Wipro's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) FreeCashFlow ($ k) YoY Growth (%)
2022-03-31 110,797,000 -20,153,000 90,644,000 -29.17
2021-03-31 147,550,000 -19,577,000 127,973,000 65.88
2020-03-31 100,643,000 -23,497,000 77,146,000 n/a
  • Average free cash flow: $98,587,666,666.70
  • Average free cash flow growth rate: 5.5%
  • Coefficient of variability (lower numbers indicating more stability): 26.7%

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in WIT have received an annualized dividend yield of 133.3% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Wipro's P/B ratio of 0.0 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock.

Since it has a lower P/E ratio than its sector average, no published P/B ratio, a steady stream of positive cash flows with an upwards trend, Wipro is likely fairly valued at today's prices. The company has poor growth indicators because of a negative PEG ratio and consistent operating margins with a stable trend. We hope you enjoyed this basic overview of WIT's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.