Cognizant shares had recently gained $1.32, or 4.1%, to $33.32, in the wake of a pronounced stock market downturn. That gain helped restore some of Cognizant's market value after investors bolted on Tuesday, sending shares down more than 19%.
Concerns about the company's lower-than-expected fourth-quarter guidance sparked the selling. Cognizant said that the typical fourth-quarter "budget flush," or the flurry of spending, didn't materialize because of concerns regarding macroeconomic issues. Credit market turmoil and high oil prices are stoking fears that consumers will rein in spending and send the economy into a recession.
But analysts say that the lack of a budget flush indicates that companies are not cutting their budgets, but merely spending in line with them rather than overspending as usual.As a result, analysts say investors gave too much weight to the fourth-quarter outlook and overlooked Cognizant's bullish 2008 prospects. Surveys from Cognizant as well as Citigroup show that information technology managers plan to increase their budgets modestly for the coming year. Citigroup's survey found that fewer than 20% of chief information officers expect macroeconomic concerns like the credit market turmoil to affect their budgets. Investors' skittishness stems in part from the fact that the fourth quarter is a critical time for IT managers and CIOs to begin planning their 2008 budgets. IBM (IBM - Get Report) fanned investors' fears in October when it said that weak third-quarter hardware sales resulted largely from cutbacks in purchases from financial services firms.