Science Applications International Corp. SAIC shares have plunged 18% in the past three months, underperforming the Zacks Computers - IT Services industry, Zacks Computer and Technology sector and the S&P index’s growth of 7.4%, 9.8% and 6.6%, respectively.

Science Applications’ underperformance can be attributed to the temporary challenges that SAIC is facing due to contract transitions and improved bid selections, creating revenue gaps. SAIC’s dim outlook for fiscal 2025 revenues of $7.425-$7.475 billion also raises investors’ concern for the stock. Nevertheless, SAIC is recouping from these headwinds and is gaining fresh contracts.

SAIC recently secured a deal worth $170.9 million from the Texas Department of Information Resources (“DIR”). In this deal, SAIC will provide cybersecurity services, including security operation services, compliance support, surveillance and risk management services.

The new DIR contract demonstrates SAIC's growing presence in state and local government sectors, where it already provides IT and cybersecurity services to the Commonwealth of Virginia, Colorado and California.

SAIC Price Performance Chart

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SAIC Gains From Its Government Client Base

Science Applications continues to prioritize the federal government market and aims to increase its market presence. In 2021, 2022 and 2023, approximately 98% of Science Application's revenues came from contracts with the U.S. government. SAIC’s main clients include various government agencies, such as Homeland Security, NASA, Department of State, and the military branches like the Navy, Airforce and Army.

Having the Navy and other federal agencies as major clients stabilizes the business and minimizes revenue fluctuations. Also, the government projects, once sanctioned, generate revenues for several years, adding to the predictability of future revenue streams.

Science Applications also benefits from the higher spending as proposed in the latest federal government budget. The increased budget is expected to accelerate the pace of contract awards, which, in turn, will be beneficial for SAIC’s top-line growth.

Macroeconomic and Competitive Challenges

Science Applications operates in a highly competitive defense, space, intelligence and mission-critical services market that comprises players like CACI International CACI, KBR Inc. KBR and Leidos Holdings LDOS.

CACI, KBR and LDOS secure several contracts from the Department of Defense, the Department of Homeland Security and other U.S. government agencies, causing highly competitive environment in this niche industry. The pricing pressure causes low-margin government deals, affecting SAIC’s profitability.

Science Applications is also facing headwinds from rising component costs and increasing labor and logistics expenses. Moreover, recession concerns amid the ongoing macroeconomic and geopolitical tensions might lead to softened spending by government agencies. The company’s near-term prospects are weighed down by these negative factors.

SAIC projects its fiscal 2025 revenues in the range of $7.425-$7.475 billion. The Zacks consensus estimate for fiscal 2025 revenues is pegged at 7.43 billion, indicating a decline of 0.13% year over year.

What Should Investors Do?

SAIC faced multiple revenue-related headwinds last year. However, the company is on the path of recovery and is getting multiple contracts from the government.

Considering these factors, it is prudent to retain this Zacks Rank #3 (Hold) stock at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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