Summary
- Traditional spending on hardware, software, and IT services consists of declining revenues from legacy categories.
- Cost savings generated by cloud and automation may witness some core spending diverted towards new technologies.
- For Accenture, new technologies, such as SMAC engagements, can represent up to 30% annual Y/Y revenue growth.
In the present note, we are commenting on the recently published IDC data, which supports strong IT spending forecast and in turn supports our thesis regarding future client wins for Accenture. After summarizing what the company does and reiterating our valuation, we present several key takeaways as they pertain to Accenture.
Basic Business / Product Analysis:
Accenture is an IT Services company that provides services in strategy, consulting, digital, technology, and operations segments. The company has a revenue base of about $40 billion, with more than 470,000 employees] serving clients in more than 200 cities in 120 countries. ACN focuses on an "as-a-service" model of service delivery, which includes business process outsourcing, cloud services, managed operations, security, and infrastructure services. Accenture works with more than 90 clients out total 100 current clients of the Fortune Global, though in recent years the company has been reaching out to smaller and “niche”-focused clients.
Valuation:
Per our industry-wide analysis and Accenture’s favorable fundamentals, and given the company’s strong top-line growth, we believe that ACN shares merit ~29x P/E multiple on 2019 earnings. When we apply it to our 2019 EPS estimate of $8.49, we get the target price of $246. We note that this P/E multiple is contingent on the S&P multiple of ~18x, and may expand/contract together with the multiple.
Strong Industry Data Supports Our Thesis:
- Traditional spending on hardware, software, and IT services consists of declining revenues from legacy categories, such as business process outsourcing, as businesses focus IT spending on a narrow selection of platforms. Over the next 5 years, IDC expects growth in tech spending to focus on mere four platforms: cloud, mobile, social and big data/analytics. This plays very well into Accenture's core focus, where SMAC-related categories generate solid double-digit revenue growth (30%+ for some engagements).
- Cost savings generated by cloud and automation may witness some core spending diverted towards new technologies, such as AI, robotics and even AR/VR. Next-gen security related to new technologies will also continue to drive significant growth at Accenture, particularly as it pertains to its Financial Services and Resources segments and, to a lesser extent, its Health and Public Service vertical.
- Let's compare industry-wide annual growth across tech-related sub-industries: hardware is at 4%, software at 7%, IT services at 4%, telecom at 1%, and new technologies at 16%. We note that for Accenture all these figures are meaningfully higher by about 300-700 bps, though the delta between new technologies (SMAC) and legacy engagements remains the same. This is very illustrative of the traction we should expect from Accenture in 2020-21 and where it will first and foremost seek to increase its engagements. The verdict is fairly clear.
- The size of the pie is also getting larger, despite prospective slowdown pressures. The Internet of things (IoT) is mainly driven by investments in the manufacturing and transportation industries, where new technologies cumulatively are approaching $1 trillion in annual revenue. In 2020-22, we expect new categories, such as robots/drones and AR/VR headsets, to accelerate growth and generate fresh demand for a number of Accenture engagements.
- For most Accenture clients, the choice is not whether or not to increase their IT services scope and not so much which of the five-six vendors (Accenture being one of them) to work with. The choice is about accurately recalibrating costs. Per IDC findings, "there is a natural cohesion between traditional technologies which continue to see growth and new technologies." Cloud and mobile enable rapid deployment and connectivity, but they also help firms cut costs and complexity in legacy operations, which thus allows many of ACN's clients to focus on new digital innovation. In our view, this will be come the main focus of our conversations with Accenture's management in the years to come.
Risks to Our Thesis:
We see the following three core risks to our long Accenture thesis.
