ACN: Richly Priced Despite Extending into GenAI and Cloud Computing

Catalysts

Products or Services that Could Move Sales or Earnings Meaningfully

1. Generative AI (GenAI): Accenture reported $3 billion in new GenAI bookings in FY'24, including $1 billion in Q4. GenAI revenue was nearly $900 million for the full year, up significantly from FY'23.
2. Cloud Migration and Modernization: Accenture sees continued growth opportunities in helping clients migrate to the cloud and modernize their applications.
3. Retirement Services: Accenture has invested to grow its capabilities and talent to capture growth in the $15 billion global retirement services market.
4. Security: Accenture's security business reached $9 billion in revenue, representing 23% growth.

Industry Tailwinds

1. Public Service/Government: Accenture sees significant opportunity in the $46 billion public service market in Europe, which is early in digitization with significant transformation investment.
2. Health Care: Accenture sees a $70 billion addressable global market for health care, which is still early in digitization.
3. Capital Projects: Accenture sees a $440 billion addressable global market for capital projects, growing around 5%.
4. Professional Services Sector: Accenture reported an earnings beat and increased its quarterly dividend by 15%, suggesting strong performance and optimism in the professional services sector.

Industry Headwinds

1. Cautious Spending Environment: Accenture's clients remain cautious on discretionary spending, with no big changes in the macroeconomic outlook.
2. Decline in Specific Sectors: Revenues in the Communications, Media & Technology and Financial Services industry groups declined compared to the prior year.
3. Economic and Geopolitical Conditions: Various risks and uncertainties, including economic and geopolitical conditions, competition, cybersecurity threats, and regulatory changes, could represent industry headwinds.
4. Enterprise Spending Reductions: Accenture forecast annual revenue below Wall Street estimates, indicating ongoing reductions in enterprise spending that are weighing on the professional services sector.

Financial Metrics

• Revenue: Accenture's total revenue for the fiscal year ending August 31, 2024, was $64.9 billion, with significant contributions from North America, EMEA, and Growth Markets.
• EPS: Accenture's EPS for the fiscal year ending August 31, 2024, was $11.57, showing a growth of 6.19%.

Assumptions

Given the current trends in their respective products and services in introducing GenAI and cloud computing in their professional consulting services, revenue is expected to reach $80.2 billion by 2027 and earnings to reach $10.4 billion by 2027.

Risks

1. Generative AI (GenAI):
   • Adoption Rates: If clients are slow to adopt GenAI technologies, the expected revenue growth from this segment may not materialize.
   • Technological Challenges: Issues related to the implementation and integration of GenAI could hinder its growth.
2. Cloud Migration and Modernization:
   • Market Saturation: The cloud migration market could become saturated, leading to slower growth.
   • Security Concerns: Data security concerns could slow down cloud adoption rates.
3. Retirement Services:
   • Market Competition: Increased competition in the retirement services market could limit Accenture's growth opportunities.
   • Regulatory Changes: Changes in regulations governing retirement services could impact the market dynamics.
4. Security Services:
   • Cybersecurity Threats: The evolving nature of cybersecurity threats requires constant innovation. Failure to keep up with these threats could impact the growth of Accenture's security services.

Valuation

3-Year Outlook (2027)

• Revenue: $80.24B
• EPS: $15.59
• Profit Margin: 13%
• Valuation Multiple: P/E of 25x

5-Year Outlook (2029)

• Revenue: $90.5B
• EPS: $18.5
• Profit Margin: 14%
• Valuation Multiple: P/E of 24x

10-Year Outlook (2034)

• Revenue: $115B
• EPS: $26
• Profit Margin: 15%
• Valuation Multiple: P/E of 22x