AI's Rise Prompts Jefferies to Cut IT Sector's Earnings Estimates

Jefferies has cut its earnings estimates for the IT sector, warning that AI will structurally shift the business mix from managed services to consulting. This transition could increase revenue cyclicality and pose new risks for IT firms.

Jefferies in its latest report has revised downward its earnings estimates for the IT sector, citing structural changes driven by artificial intelligence (AI), which may significantly alter the traditional business mix of IT companies.

AI's Impact on Business Mix and Earnings

According to the report, AI is expected to structurally shift IT companies' business mix towards consulting and implementation services while shrinking the share of managed services. This transition could increase cyclicality in revenue growth and require changes in talent strategies and operating models, thereby adding new risks for IT firms.

It stated "AI may structurally change IT business mix towards consulting/ implementation while shrinking managed services". Jefferies noted that despite a 16 per cent fall in IT stocks year-to-date, the sector still offers higher downside risk than upside potential.

Reflecting these concerns, the brokerage said it has lowered its earnings per share (EPS) estimates for the sector by 1-4 per cent and expects earnings to grow at a compound annual growth rate (CAGR) of 6 per cent over FY26-28.

Shift from Managed Services to Advisory

The report highlighted that while IT firms will remain relevant; the nature of client engagements is expected to undergo a structural transformation. Companies are likely to see a higher share of advisory and implementation-related work, while application managed services, which currently contribute about 22-45 per cent of revenues, could face sharp revenue deflation.

It added that the extent and timing of this revenue deflation in managed services could intensify as AI tools continue to improve and become more capable. The brokerage noted that AI-driven efficiencies may reduce the need for traditional managed services, thereby impacting a significant portion of IT companies' revenue streams.

Increased Revenue Cyclicality

At the same time, the increasing share of advisory and implementation work is expected to make revenue growth more cyclical, as these services tend to be more dependent on client spending cycles compared to recurring managed services contracts.

Talent and Operational Model Overhaul

Further, the report emphasised that this shift would require IT companies to make significant changes to their talent and operating models. Firms may need to invest in building new skills and capabilities aligned with AI-led consulting and implementation services, which could increase operational complexity and execution risks.

So the report maintained that while AI presents opportunities, it also introduces structural risks for the IT sector, prompting the brokerage to lower its earnings outlook and remain cautious on the sector's near- to medium-term growth trajectory.

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