Amdocs Ltd

Amdocs has been negatively impacted as it is perceived as a casualty of artificial intelligence. The company operates a hybrid model with two-thirds of revenue from managed services and one-third from systems integration/custom software. Its core billing and customer care systems are critical for telecommunications giants, making them less susceptible to quick displacement. However, the stock is trading at a historically low valuation of around 7x free cash flow, which reflects a severe outcome that is not evident in the current business trajectory. While Amdocs may pass along automation benefits to clients, this could constrain revenue growth.

Amdocs Ltd. provides IT services to telecommunication companies as they seek to digitally transform operations and customer service; leading clients include AT&T and T-Mobile. Amdocs posted a solid quarter, with a slight earnings beat and modestly higher guidance. Amdocs has been actively engaged in using AI to enhance its value proposition, including by introducing an agentic operating system designed specifically for the telecom industry. We think this mix of uncertainty is reflected in the stock price, and we maintained our position.

Amdocs was among the largest detractors in our portfolio, reflecting current investor concerns that resemble the skepticism surrounding the transition to cloud computing. While the market views AI as a threat to portions of the IT services industry, we believe many companies, including Amdocs, are well positioned to benefit by helping clients implement and optimize these technologies. However, the recent performance indicates that the market is overly focused on disruption risks, which has negatively impacted Amdocs' valuation.

Amdocs has faced significant challenges as fears surrounding AI's impact on its business model have intensified. The market appears to be misinterpreting the critical nature of Amdocs' services, which are deeply embedded within major companies. Despite this, the stock has declined materially, reflecting concerns that AI may shrink their respective businesses. We believe the market is underestimating the importance of Amdocs' offerings, which could lead to further volatility in its stock price.

Amdocs is mentioned as part of the Fund’s underweight exposure to the information technology sector, which has been a significant detractor from performance. Investor concerns are noted regarding the durability of legacy enterprise software models amid rapid advancements in AI, with Amdocs specifically highlighted as a company in this category. The letter indicates that the market may have excessively discounted the near-term disruption risk for such companies.

Amdocs is mentioned as part of the Fund's holdings in the technology sector, which performed poorly due to concerns about the durability of legacy enterprise software models amid rapid AI advancements. The manager notes that the market has excessively discounted the near-term disruption risk for companies like Amdocs, indicating a belief that the current valuation may not reflect the long-term potential.

Amdocs is our largest position and we believe it is far less exposed to AI-driven disruption than many SaaS companies. The company is deeply embedded in systems of record and mission-critical infrastructure for tier-1 telecommunications customers, which results in high switching costs and strong customer retention. Amdocs generates revenue through long-term managed services contracts that often involve substantial customization and integration. While AI may compress some service revenue, Amdocs is proactively incorporating automation and AI into its offerings, focusing on automating infrastructure complexity within regulated telecom ecosystems. The valuation is attractive at approximately 10x free cash flow, the cheapest it has been in years.

Amdocs, which is one of the Fund’s largest positions, posted a modest share price decline in the period despite continuing to deliver steady gains in operating income. Investors less familiar with the company may be confused by recent decreases in the top line, which stemmed from an intentional disposition of certain no-margin, non-core businesses. Our valuation for Amdocs has increased reliably over the years. Due to the company’s operating stability, excellent balance sheet, and strong competitive position in helping its customers modernize their networks, we assign the shares an above average valuation multiple.

We initiated a position in Amdocs, a provider of software and services to communications and media companies in both developed and emerging markets. Amdocs pays a 2.6% dividend, which is slightly above average in the universe. The company is also buying back shares, which we view positively. Overall, the stock ranks in the top 15% of stocks in our ranking universe, which is within our buy range.