7 Green Flags for Accenture's Future

Accenture's (ACN 0.28%) stock price hit an all-time high on Dec. 16 after the IT services giant posted its first-quarter earnings report. Its revenue rose 27% year over year to $15.0 billion, beating estimates by $750 million, as its earnings grew 20% to $2.78 per share and topped expectations by $0.15.

Those growth rates were impressive, but Accenture's stock could still have a lot more upside potential, for seven simple reasons.

Image source: Getty Images.

1. Accelerating revenue growth

Accenture provides IT services to five industries: communications, media, and tech (20% of its revenue in fiscal 2021); financial services (20%), health and public services (19%), products (28%), and resources (14%).

The pandemic throttled Accenture's growth across all of those industries except for the health and public services market in fiscal 2020.

However, all five markets recovered as those headwinds faded and more businesses reopened. After returning to growth in the second quarter of 2021, Accenture's revenue growth accelerated significantly over the past year:

YOY = Year over year. Local currency terms. Source: Accenture.

2. A big guidance boost

In its fourth-quarter report in August, Accenture predicted its revenue would rise 12%-15% on a local currency basis in fiscal 2022, which would have been comparable to its 14% revenue growth in fiscal 2021.

But this time around, Accenture boosted its full-year revenue guidance to 19%-22% growth. That new guidance includes a 5% inorganic boost from its recent acquisitions, but the midpoint of its 14%-17% organic growth rate would still surpass its previous guidance and its growth rate in 2021.

3. The robust growth of its "strategic priority" businesses

Accenture has been aggressively expanding its higher-growth cloud, interactive, industry X (digital transformation), and security businesses -- collectively known as its four "strategic priorities" -- to offset the slower growth of its legacy IT services.

Expanding those four growth engines will also widen Accenture's moat against smaller IT rivals like Globant (GLOB -0.13%), which manages websites, mobile apps, digital marketing campaigns, and cloud services for companies.

Accenture noted that all four strategic priority segments generated "strong double-digit growth" in revenue during the first quarter.

4. Expanding operating margins and rising earnings

Accenture employs about 624,000 people worldwide and operates in 200 cities across 50 countries. That massive scale enables the company to maintain very healthy operating margins, which expanded both sequentially and year over year in the first quarter of 2022:

YOY = Year over year. Source: Accenture.

Back in August, Accenture expected its adjusted EPS to rise 13%-16% in fiscal 2022. But this time, it boosted its earnings guidance to 17%-20% growth.

5. Its efficient use of its free cash flow

Accenture returned more than 100% of its free cash flow (FCF) to investors through buybacks and dividends in fiscal 2021. It will likely continue that tradition this year from its targeted annual FCF of $7.7 billion to $8.2 billion.

Accenture's buybacks mainly offset the dilution from its stock-based compensation instead of significantly reducing its share count. Its forward dividend yield of 1% also probably won't attract serious income investors.

Nonetheless, Accenture's efficient usage of its FCF is a smart strategy, since its stagnant cash holdings will lose value in an inflationary environment.

6. It still isn't that expensive

At $400 per share, Accenture trades at 38 times the midpoint of its earnings forecast for fiscal 2022. That forward price-to-earnings ratio might seem frothy for a 32-year-old IT services company.

But it's not extremely high if Accenture can consistently grow its revenue and earnings by 15%-20% annually over the next few years. That's a realistic target since Accenture is already the 800-pound gorilla of the IT services market and is constantly expanding by gobbling up smaller players.

Globant, which is growing a bit faster than Accenture, is also a lot pricier at 65 times forward earnings.

7. The secular expansion of the IT services market

Lastly, the IT services market will continue to expand as more companies upgrade their aging infrastructure, install new cybersecurity services, migrate their businesses to cloud platforms, and launch new digital initiatives to reach a new generation of customers.

Mordor Intelligence estimates the global IT services market will grow at a compound annual growth rate (CAGR) of 10.36% between 2021 and 2026. As a market leader, Accenture will likely grow faster than the broader industry.

Based on these facts, I believe Accenture is still a solid long-term investment. It might not generate massive near-term gains, but it's the kind of well-rounded tech stock you want to own in this wobbly market.