Last month, we published an article on Accenture’s (NYSE:ACN) proactive approach to economic challenges. Since we published the article, the company has made strong strides in the realm of artificial intelligence (AI), marking a forward-thinking approach that could reward investors amidst the current AI boom. By acquiring Flutura, partnering with Salesforce, and making a strategic investment in Stardog, Accenture is not just participating in, but actively driving the AI revolution. The company’s robust strategy to foster AI technologies across diverse sectors highlights its commitment to capitalize on the growing demand for AI services. This forward-thinking approach and its effective execution are justifiable reasons for Accenture’s premium valuation.
The announced collaboration between Salesforce (CRM) and Accenture to accelerate the deployment of generative AI across CRM technologies could be a significant development for Accenture and its investors. This partnership underscores Accenture’s commitment to staying at the forefront of AI innovation, and it could potentially solidify its position as a leader in the implementation and optimization of AI technologies.
By establishing an acceleration hub for generative AI, Accenture and Salesforce aim to provide clients with effective strategies and technologies for harnessing this advanced form of AI. This could mean that Accenture’s clients, regardless of their industry, will have a more streamlined and efficient path to leveraging generative AI to enhance their CRM capabilities.
Furthermore, the collaboration with Salesforce, a recognized leader in CRM technology, could allow Accenture to blend its extensive industry knowledge with Salesforce’s cutting-edge technology. This partnership might result in a powerful combination that could significantly improve the efficiency and effectiveness of generative AI deployment in CRM systems. For Accenture investors, this could mean an enhanced value proposition for the company’s services, potentially leading to increased revenues and profitability.
In addition, the new hub will be in partnership with Accenture’s Generative AI and Large Language Model (LLM) Center of Excellence, thereby providing companies with valuable access to the latest research and cutting-edge generative AI technologies. This move shows that Accenture is not only investing in the application of generative AI but also playing an active role in advancing the field. This could significantly enhance Accenture’s reputation as an innovative player in the AI space, potentially attracting more business and driving growth.
Acquisition of Flutura
The acquisition of Flutura, an industrial AI company, by Accenture could represent a significant strategic move for the company and its investors. This acquisition signals Accenture’s ongoing commitment to strengthening its AI capabilities, particularly in the industrial sector. This could mean a more comprehensive and robust AI portfolio, potentially leading to increased demand for Accenture’s services and, consequently, higher revenues and profitability.
Flutura’s expertise in industrial data science services and its AI platform, which provides advanced analytics solutions for asset-intensive companies, could enable Accenture to deliver more value to its clients. This could not only improve the performance of plants, refineries, and supply chains but also help clients achieve their net zero goals faster. For Accenture’s investors, this could signify that the company is well-positioned to take advantage of the growing trend of digital transformation and sustainability in the industrial sector.
The acquisition could also enhance Accenture’s geographical reach and client base, especially in growth markets like Australia, South-East Asia, Japan, Africa, India, Latin America, and the Middle East, where industrial AI-led transformation is increasingly gaining traction. This could potentially open new revenue streams and growth opportunities for Accenture.
Moreover, the acquisition could bolster Accenture’s standing as a leader in AI services. Research presented by Accenture at the 2023 World Economic Forum in Davos indicates that companies need strong AI capabilities to build a digital core and become more successful. However, most companies are not very AI-mature and have barely tapped into the technology’s potential. By acquiring Flutura, Accenture is poised to help these companies unlock the full potential of AI, thereby broadening its market reach.
Furthermore, Accenture’s acquisition of Flutura continues its pattern of expanding its AI capabilities through strategic acquisitions. The company has previously acquired other AI-focused firms globally, such as ALBERT in Japan, Analytics8 in Australia, and Clarity Insights in the US. This consistent investment in AI expertise and capabilities indicates that Accenture is highly focused on this area, which could be a positive sign for investors given the growing demand for AI services.
Accenture’s strategic minority investment in Stardog, a developer of Enterprise Knowledge Graphs, could be a significant development in the company’s AI strategy, potentially providing a competitive edge for Accenture and its clients in the evolving AI landscape.
Stardog’s technology, which creates knowledge graphs of data that can be utilized by generative AI for detailed searches, is an innovative solution to a critical challenge facing businesses today. By aggregating data from multiple sources into machine-understandable formats without altering the underlying data, Stardog’s solution significantly enhances the ability to search and analyze complex, disparate datasets. This could enable Accenture to deliver more efficient, targeted, and context-aware services to its clients.
Accenture’s investment in Stardog also reveals a strategic shift towards modern data stacks that focus on interconnecting data lakes, partners, and systems. This approach resonates with the current trend towards multi-cloud, multi-system, and multi-partner data environments, which have become prevalent due to data sovereignty requirements. Stardog’s knowledge graph technology provides the necessary connectivity map to index and navigate these complex data ecosystems, making it a potentially indispensable tool for Accenture’s AI strategy.
Furthermore, Stardog’s technology may serve as a powerful enabler for generative AI, adding crucial context to large language models. This context could potentially facilitate more effective and personalized AI interactions, such as the example provided by Teresa Tung, wherein a retail company could leverage Stardog’s technology and a large language model to provide personalized product recommendations for a customer planning a vacation.
Note: Accenture also recently acquired Einr AS, a Norwegian business consulting company specializing in logistics solutions. We do not believe this acquisition is AI-driven, so we will not cover this acquisition in this article.
Financial & Valuation
Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.
ACN’s recent Q2 earnings report, released on 03/23/2023, showcased a solid performance that saw the stock trading up 7.3% on the day. The company reported year-on-year revenue growth of 5.1%, aligning perfectly with consensus estimates, and taking the revenue total to $15.8 billion. The gross margin came in at a respectable 30.6%, while the operating margin exhibited a slight improvement, rising from 13.7% the previous year to 13.8%. We believe this slight increase in the operating margin demonstrates effective cost control and operational efficiency, which is a promising sign for future profitability.
We are particularly impressed by ACN’s revenue growth, which has risen by a compound annual growth rate (CAGR) of 12.5% over the past three fiscal years. However, sell-side consensus forecasts a deceleration, predicting revenue growth of 4.5% this fiscal year, to reach $64.3 billion, and 6.6% the following fiscal year, with an end result of $68.6 billion. Given ACN’s track record, we believe these estimates may be conservative.
The expansion of ACN’s EBIT margin over the past three fiscal years, from 14.6% to 15.2%, is a clear indicator of the firm’s improving profitability. However, the consensus is forecasting a slight contraction to 15.1% this fiscal year, followed by a minor expansion to 15.3% the following year. These are nuanced movements and it’s important to note that the company’s overall EBIT trend is positive, showing its ability to translate top-line growth into bottom-line returns.
ACN’s share dynamics over the past few years have been interesting. Despite spending 2.7% of its revenue on share-based compensation (SBC), the number of diluted outstanding common shares increased by 3.9%. However, this has not negatively impacted the EPS, which grew at a CAGR of 13.3% over the past three fiscal years, outpacing its revenue growth. This is a testament to the company’s effective use of capital and its ability to generate shareholder returns.
The company’s strong return on invested capital, pegged at 29.3%, coupled with a net cash position of $6,183 million, indicates a robust balance sheet. This is an indication of ACN’s financial health and its ability to invest in growth opportunities while managing potential downturns.
While ACN’s stock performance over the past year has been somewhat lackluster, underperforming the S&P 500 by 7%, it’s important to note that it currently trades at a premium compared to the S&P 500 across EV/Sales, EV/EBIT, and P/E multiples. It’s trading at a discount only on the FCF multiple. This premium, coupled with the low short interest of 1.2%, suggests that the market recognizes the company’s solid fundamentals and future growth potential.
ACN is currently trading at an EV/Sales multiple of 2.6, an EV/EBIT multiple of 16.9, a P/E multiple of 22.2, and a FCF multiple of 19.1. Relative to the S&P 500, ACN is trading at an EV/Sales premium of 18.3%, an EV/EBIT premium of 8.2%, a P/E premium of 32.4%, and an FCF discount of 1.9%. While these multiples suggest a valuation on the higher side, ACN’s robust financials and growth prospects may justify this.
The stock’s FY2 PEG ratio, at 2.2, is at a significant premium of 41.7% compared to the S&P 500’s PEG ratio of 1.5. This suggests that the stock’s valuation is high relative to its expected growth rates, potentially signaling that investors are willing to pay a premium for the company’s future earnings growth. While this might be a red flag for value-focused investors, it’s important to note that growth-oriented investors often view high PEG ratios as an acceptable cost for future expansion.
However, despite the optimism, we can’t overlook the fact that ACN’s recent performance in the market has been somewhat disappointing. The stock is currently trading 0.7% below its 200-day moving average and 14% below its 52-week high of $322.88. Yet, it’s also 14% above its 52-week low of $242.80 per share, showing some resilience.
The company’s dividend yield stands at 1.6%, which is 5 basis points above the S&P 500’s dividend yield. Although it’s not a high yield by any means, it is still a positive factor for income-focused investors. Given ACN’s strong balance sheet and cash position, we believe the company is well-positioned to maintain or even increase its dividend in the future, which could attract income-seeking shareholders.
Accenture’s calculated investments and strategic partnerships in the AI space point towards a promising future for the company and its investors. By bolstering its AI capabilities, Accenture is positioning itself to effectively address the evolving demands of the AI market, thus unlocking significant growth potential. Although the company’s shares have underperformed the S&P 500 over the past year, its recent strategic moves and solid financials suggest that it is well-positioned to deliver sustained growth in the longer term.
Accenture’s premium valuation can be justified by its innovative approach, consistent performance, and the strategic investments it is making to ensure a bright future in the AI arena. While the company’s PEG ratio might be a concern for value-focused investors, the potential for future earnings growth could be an acceptable trade-off for growth-oriented investors. Ultimately, Accenture’s strategic efforts to harness the power of AI provide a compelling argument for why it remains an attractive investment proposition in the current AI boom.
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