The Finance Ghost is excited to share one of his favorite picks, Accenture. Discover the reasons why Accenture stands out with its strong business model, impressive growth, and promising future in technology and AI solutions.
Accenture is due to release second quarter results for the 2024 financial year very soon. With the share price up 10.8% this year and a whopping 46% over the past 12 months, a lot of attention will be paid to these numbers.
As one of the core positions in my offshore portfolio, I’ll certainly be paying attention as well.
Right business model, right time
With over 740,000 employees around the world, Accenture is a massive operation that puts people at the centre of the business. At its core, the group is a management consultancy with a strong slant towards technology solutions, which means they have been incredibly well positioned in the aftermath of the pandemic as companies have changed their operating models and transitioned into cloud solutions.
Of course, with cloud now an accepted part of daily life, Generative Artificial Intelligence (AI) is all the rage. Guess which company is playing a strong role there as well? Yup, Accenture.
The world’s leading enterprises trust Accenture. It’s as simple as that. In a business landscape of independent boards and risk committees that are terrified of straying beyond the “nobody gets fired for hiring IBM” way of thinking, Accenture gets a seat at the table to pitch for work at meaty hourly rates. Or, even better, project fees.
People may tell you that selling time is a silly business model, as time is finite. The correct response is that although time is finite, the effective rate earned per hour is not. When you start charging project and solution fees on top of more typical consulting services, it’s amazing how that hourly rate can ramp up. Accenture has cleverly positioned its business in such a way that “consulting” is 52% of revenue and “managed services” is 48% of revenue.
Best of all, Accenture is exceptionally good at becoming entrenched in organisation. By the time the consultants have been designing and implementing technology solutions for a few years, there are few or no full-time employees at the client who actually understand the full picture. The more Accenture works with large organisations, the greater the extent of reliance on Accenture that gets baked into the system.
What does this mean? Loads of repeat business and little room for the company to argue with Accenture about fee increases. Provided that Accenture acts fairly and protects its reputation, corporates won’t even mind this too much.
Another key highlight of this model is that Accenture is relevant across multiple sectors. After all, you’ll struggle to find a large corporate that isn’t focused on technology-driven efficiencies. Across sectors like banking, health, communications and resources, Accenture earns its revenue from highly diversified sources. This helps justify the lofty valuation multiple that the market happily pays for the business.
Show me the money
Over five years, TIKR tells me that the Accenture share price has achieved a compound annual growth rate (CAGR) of 16.7%. Remember, this is in US dollars!
The rand has moved from R14.340 to R18.75 over the same period. If you had invested R100,000 in Accenture five years ago, the position would now be worth R299,000! And this is ignoring dividends, by the way.
The question, of course, is this: can Accenture keep delivering returns for shareholders? To answer this question, we need to consider both the growth in the business and the current valuation after such a strong run in the share price.
Accenture isn’t immune to macroeconomic pressures
As strong as the technology trends are, we also can’t ignore the fact that finance costs are high and many companies have either reduced or delayed projects as they prioritise debt reductions in this environment instead.
This is partly why revenue growth for the last quarter was just 3% growth in US dollars and 1% on a constant currency basis. North America was actually down by 1%, with EMEA growing 2% and the “Growth Markets” (as defined by Accenture) up 5%.
Despite the modest revenue growth, the company managed to expand its operating margin by 20 basis points to 16.7% and increased earnings per share by 6%. Thanks to the capital-light model where the most significant investment is in acquisitions rather than anything else, return on assets is a wonderful 14%. Return on equity comes in at 27%!
Speaking of acquisitions, the sheer scale of Accenture means that the company can mop up bolt-on acquisitions at an astonishing pace, in areas ranging from cloud through to cybersecurity.
Where there are gaps in the service offering relative to technology trends, the company can plug them through acquisitions. This makes it a platform business that does the hard work for me by allocating by capital to the right places to catch the latest and greatest opportunities in tech.
AI: a very helpful growth engine
Accenture sold around 300 Generative AI projects worth a total of $300 million in all of FY23. In the first quarter of the 2024 financial year, the company sold projects worth $450 million in Generative AI. The growth rate is ridiculous in this area.
As you would expect based on what you just learnt about the bolt-on acquisitions strategy, Accenture isn’t shy to invest in this area. As a perfect example, the group acquired Italian firm Ammagamma for its Generative AI expertise and 90 experienced professionals.
Alongside ongoing investment by enterprises in cloud solutions, the demand for Generative AI could well be the tailwind that Accenture needs to continue its excellent growth path. And of course, as they build product leadership in this area, the opportunity to sell services at higher rates is clear. This does wonderful things for operating margins, particularly alongside ongoing efforts to streamline the business. The combination leads to an expectation for further margin expansion in 2024.
Is the valuation too high?
Accenture’s share price has run hard recently. In fact, it sits very close to the 52-week high at time of writing. At $383 per share, it isn’t far off the December 2021 peaks around $415 per share. With a 52-week low of $242 per share, any consolidation in the share price (i.e. a return towards the levels seen in the early part of 2023) would be painful.
If you’re a swing trader looking for short-term opportunities, this has probably run too hard. The upside vs. downside case isn’t compelling.
For a longer-term investor like me, Accenture represents an excellent way to take a view on investment in technology as a whole. Like in my Microsoft thesis, I believe that enterprise-level spend on technology is likely to accelerate rather than decelerate in coming years, especially as interest rates eventually start to come down.
On an EBITDA multiple of nearly 20x, Accenture certainly isn’t cheap. The multiple peaked at nearly 29x at the end of 2021, admittedly in an extremely frothy market fuelled by stimulus and low interest rates. The average over 5 years is 19x, so Accenture is trading roughly in line with that average.
It’s easy to take a philosophical view that multiples like these are simply too expensive, or that a dividend yield of 1.2% isn’t enough. Value investors will find it difficult to get their heads around Accenture. Growth investors, on the other hand, are firmly in the right place.
Trying to time the market is exceptionally hard on a good day. As South Africans, we would need to try time both the US market and the USD/ZAR cross when taking a new position in an offshore stock. It’s almost impossible to get it perfectly right.
For me at least, Accenture has been and will still be a core part of my offshore portfolio. If I didn’t already have a position, I would probably wait for the share price to give back some of the recent gains before I bought shares. Of course, one can end up waiting for that forever.
Most importantly, with a genuine long-term view, small differences in entry point don’t have a huge impact on eventual returns. I firmly believe in the growth drivers at Accenture and I have no plans whatsoever to sell in the near-term, so volatility doesn’t scare me. In fact, it might create an opportunity to buy more!
As was hopefully quite clear in the article, The Finance Ghost holds shares in Accenture. He plans to do so for a very long time.
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