🗞 What Happened to Accenture?

Happy Sunday! 👋 

Today we’re taking a look at the sudden downfall of the world’s largest publicly traded consulting firm, Accenture.

Let’s dive in!

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What Happened to Accenture?

Shares of Accenture fell 18% on Thursday, wiping out roughly $18 billion of market cap in a single day.

This caps off the worst year in Accenture’s history, with shares now down 50% year-to-date and almost 70% from the 2022 highs.

So what went wrong?

Accenture’s Q3 earnings report on Thursday was a mixed bag. Earnings per share came in 2.5% above analyst expectations, while revenue missed by 0.2%.

But it wasn’t the headline numbers that worried investors.

New Bookings declined 2% compared to a year ago, driven by a 15% decline in its “Managed Services” segment.

This led to Accenture reporting a book-to-bill ratio of 1.03, which is tied for their lowest figure in 5 years. For those unfamiliar, book-to-bill compares new orders received (bookings) to the amount of revenue delivered (bills) over a specific time period. In other words, it shows if the company is booking more future business than it currently generates. If the number is above 1.0, that means the company is growing.

“New Bookings” is naturally a lumpy metric. Just look at the chart above for evidence.

Accenture deals with massive, multi-year IT transformation contracts that can often exceed $100 million in size. That means the timing of when those contracts are signed can have a major impact on the New Bookings for a given quarter. So it’s not abnormal for Accenture to see big drops in certain quarters.

However, to make matters worse, Accenture’s management team also lowered their revenue growth guidance for the full year from 3%-5% to 3%-4%.

Is Accenture being disrupted by AI?

The biggest concern among investors at the moment (and the reason why the stock is down ~70% from highs) is the threat that AI could potentially replace some of the work that Accenture performs.

To really assess the risk/opportunity that AI provides, it’s best to take a step back and think about the role that Accenture actually serves.

At its core, Accenture helps large corporations, governments, and organizations implement technologies & business strategies.

I know that’s broad, but their range of services is virtually endless, so it’s hard to be much more specific. In almost every case, Accenture provides the people (they have ~800K employees) and expertise to plan, build, and manage new technologies or business strategies.

For example, IHG Hotels & Resorts (which owns major brands like Holiday Inn, Crowne Plaza, and Kimpton) recently needed a revamp for their mobile app, so they contracted Accenture to help in the process.

Within about a year, Accenture had designed, built, and launched the completely overhauled IHG One Rewards mobile app for both iOS and Android. That included localizing it into 18 different languages, personalizing guest journeys, and linking the app to IHG’s loyalty ecosystem. Today, the app has a 4.9-star rating on the iOS App Store. 

Accenture is unique in that, in a situation like that, instead of providing a single service (like app design for example), they can manage the entire process end to end. That goes from planning and strategizing on the best features to include, to maintaining the app on an ongoing basis. Being a true one-stop-shop for IT needs is a major differentiator for them versus other consulting firms.

Back to the question, can AI replace outsourced labor and disrupt Accenture? In some ways, probably, yes. If you think about the IHG example from above, some of the baseline coding for the app could probably have been handled by AI.

But is that why companies hire Accenture, for their baseline coding skills? Is that why IHG hired Accenture? Doubtful. Rebuilding the primary touchpoint for consumers and transferring customer data from legacy systems is high stakes. AI can’t log into a 25-year-old, fragmented, proprietary mainframe system that lacks modern documentation and figure out how to safely wire it to a mobile app. You need a hands-on operator, and preferably one that’s done something similar before. That’s why you turn to Accenture.

So is AI the reason why growth slowed last quarter? Management certainly doesn’t think so.

Current Valuation

With their recent drawdown, it’s fair to say sentiment has never been worse for Accenture. They are currently trading at their lowest valuation ever… and by quite a ways.

Accenture currently trades at an Enterprise Value to Free Cash Flow multiple of 6.2. 

That means they generate more than 16% of their current market cap in cash every year. And management distributes most of that cash flow back to shareholders through dividends and buybacks.

Of the $12.6 billion in free cash flow that the company generated in the last 12 months, $5.7 billion went to buybacks and $3.9 billion went to dividends.

• Dividend Yield: 4.98%

• Buyback Yield: 5.49%

That’s all for this week. 

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