Investment thesis and rating change
Morgan Stanley upgraded Capgemini SA to "equal-weight" from "underweight" on Thursday, saying the company’s steep selloff so far this year has shifted the stock to a more balanced risk-reward position even as the brokerage retains a cautious view on the IT services sector overall.
The move follows a roughly 26% year-to-date decline in Capgemini’s share price through Feb. 18, making it the weakest performer in Morgan Stanley’s European IT services coverage universe, which itself is down about 14% over the same period, according to the report.
Valuation and price-target revision
Morgan Stanley reduced its price target on Capgemini to €117 from €142. The cut reflects an increase in the firm’s weighted average cost of capital (WACC) to 9.5% from the prior 9%, a change the brokerage attributes to lower visibility around the company’s medium-term growth path amid potential disruption from artificial intelligence.
The brokerage noted that Capgemini’s next-twelve-month (NTM) price-to-earnings multiple has fallen from roughly 11x at the start of 2026 to about 8x, a level that approaches the company’s 20-year trough near 6.7x recorded during the 2008-09 financial crisis.
FY25 results and management commentary
Capgemini’s FY25 report released last week showed organic growth improving to about 4% in the fourth quarter. Management said it expects "good growth to continue in H1" 2026, and full-year guidance on revenue and margins was broadly in line with consensus.
Still, CEO Aiman Ezzat warned that "we’re still in an environment that’s basically not the most stable" and added "On the pricing, I don’t see there’s any change." Morgan Stanley interprets those remarks as evidence that IT spending is muted but stable, a picture consistent with the brokerage’s own 4Q25 CIO Survey. The firm expects neither a V-shaped recovery nor a significant near-term downside to growth.
Restructuring, cash flow and forecast adjustments
The FY25 results also introduced a €700 million restructuring program, labelled "Fit for Growth," to be implemented over two years and focused on workforce and cost realignment. Morgan Stanley said a restructuring of that magnitude is "not indicative of a company that is seeing significant near-term growth opportunities."
The expected restructuring charges are projected to depress free cash flow (FCF) in FY26 and FY27. As a result, Morgan Stanley trimmed its FCF forecasts by about 7% for FY26 and 12% for FY27. The brokerage noted it is roughly 11% and 14% below Street consensus on FCF for FY27 and FY28, respectively, and anticipates further downward revisions to consensus estimates.
Historically, Capgemini’s FCF increased at about a 1% compound annual growth rate (CAGR) from FY21 to FY25, while company-adjusted EBIT expanded at approximately a 6% CAGR over the same interval, the report states.
AI disruption risk and pressure points
Morgan Stanley laid out four potential channels through which AI could pressure Capgemini and peers: 1) prioritization of AI projects crowding out other initiatives; 2) software vendors offering solutions that reduce reliance on services partners; 3) contract pricing pressure as AI-driven efficiencies erode labor-based revenue; and 4) rising investment demands for proprietary intellectual property that could limit margin expansion.
The analysts rank IT services among the highest-risk subsectors for credible AI disruption across 11 European technology, media, telecom and business services categories.
Forecast scenarios and valuation multiples
Morgan Stanley’s base case assumes roughly 3% organic revenue growth annually through FY29, below the Visible Alpha median consensus of about 3.5% to 4.5%. The firm models compound adjusted EBIT growth of about 3.6% from FY26 to FY29, with only limited margin improvement beyond FY26.
Under the broker’s bull case, which assigns a €160 price target, Capgemini would leverage AI demand and the WNS acquisition to achieve roughly 5% revenue CAGR through FY29. The bear case, carrying a €60 price target, assumes severe AI-driven pricing compression with revenue growth dropping toward 0% by FY30-36 and terminal margins compressing to about 10.5%.
At the Feb. 18 closing price of €105.30, Morgan Stanley said the stock trades at roughly 8.3x and 7.7x NTM company-adjusted P/E for FY26 and FY27, respectively, on a pre-stock-based compensation basis. On the firm’s estimates, the stock implies a free cash flow to firm (FCFF) yield of about 8.5% to 8.9% for FY26-27.
Street positioning and market consensus
Consensus ratings cited by Morgan Stanley (Refinitiv) show 70% of analysts at "overweight," 20% at "equal-weight," and 10% at "underweight." The consensus price target stands at €208, markedly higher than Morgan Stanley’s revised €117 target.
Conclusion
Morgan Stanley’s upgrade to equal-weight reflects the firm’s view that Capgemini’s dramatic YTD share decline has brought valuation to a level that balances risk and reward. However, the brokerage trimmed its price target and raised its discount rate to reflect persistent uncertainty over medium-term growth, the near-term cash flow impact of a substantial restructuring, and a range of credible AI-related disruption scenarios that could compress pricing and margins for IT services providers.