Accenture's (ACN 1.31%) stock fell 6% on Dec. 16 after the IT services giant posted its latest earnings report. For the first quarter of fiscal 2023, which ended on Nov. 30, its revenue rose 5% year over year (and 15% in local currency terms) to $15.7 billion and surpassed analysts' estimates by $160 million. Its earnings increased 11% to $3.08 per share, which also cleared the consensus forecast by $0.18.
Those growth rates seem stable, but investors clearly weren't impressed and Accenture's stock remains down more than 30% this year. Will this blue chip tech stock bounce back in 2023 and beyond? Let's compare the bear and bull cases to decide.
Image source: Getty Images.
What the bears will tell you about Accenture
The bears will point out that most of Accenture's core growth engines are sputtering out. The company provides IT services to five main sectors: communications, media, and tech (19% of its first-quarter revenue); financial services (19%); health and public services (19%); products (30%); and resources (13%). But over the past year, all five of these segments reported decelerating revenue growth in local currency terms:
|
Segment |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
|---|---|---|---|---|---|
|
Communications, media, and tech revenue growth (YOY) |
32% |
32% |
31% |
23% |
11% |
|
Financial services revenue growth (YOY) |
24% |
25% |
24% |
22% |
13% |
|
Health and public services revenue growth (YOY) |
23% |
21% |
19% |
19% |
15% |
|
Products revenue growth (YOY) |
34% |
34% |
31% |
25% |
15% |
|
Resources revenue growth (YOY) |
17% |
25% |
26% |
21% |
21% |
|
Total revenue growth (YOY) |
27% |
28% |
27% |
22% |
15% |
Data source: Accenture. YOY = year over year. Local currency terms.
Accenture broadly blamed that slowdown on macroeconomic headwinds, which throttled IT spending across the media, tech, financial, and retail sectors. Its resources market remained more resilient as inflation drove up energy prices.
Meanwhile, the rising dollar -- which shaved a whopping 10 percentage points off its reported revenue growth in the first quarter -- continues to gobble up its overseas revenue. In local currency terms, Accenture expects its revenue to rise 6%-10% year over year in the second quarter and to increase 8%-11% for the full year. But it expects the foreign exchange-related headwinds to reduce its full-year revenue by about 5 percentage points, which implies its reported revenue will only increase 3%-6% in fiscal 2023 compared to its 22% growth in fiscal 2022. On an organic basis, which excludes 2.5 percentage points of inorganic growth through acquisitions, that full-year growth will likely fade to an anemic 0.5%-3.5%.
Accenture previously seemed like a great alternative to slower-growth IT service providers like IBM's spin-off Kyndryl, but it now faces intense macroeconomic and currency-related headwinds. That pressure won't ease as long as interest rates keep rising, so many investors remain bearish on its near-term prospects.
NYSE: ACN
Key Data Points
What the bulls will tell you about Accenture
The bulls will tell you that Accenture has weathered plenty of economic downturns before, and that it will still benefit from the long-term digitization of businesses as they upgrade their cloud infrastructure services, strengthen their cybersecurity defenses, automate more tasks, leverage AI to make data-driven decisions, and expand their apps and websites.
During the conference call, CEO Julie Sweet said the "current macro is making it even clearer to clients that they need to change more, not less" to "succeed in the near, medium and long term." Sweet also noted that "99 of our top 100 clients have been with us for over 10 years" -- so Accenture still has plenty of long-term staying power in the IT services market.
As Accenture's revenue growth cools off, it's cutting costs to boost its margins and earnings. That's why its operating margin rose 20 basis points year over year to 16.5% in the first quarter. For fiscal 2023, it expects its operating margin to expand 10-30 basis points from fiscal 2022 to 15.3%-15.5%, and for most of that expansion to occur in the second half of the year.
As a result, Accenture expects its earnings per share to increase 5%-8% for the full year, and that midpoint exceeds analysts' expectations for 6% growth. It also plans to keep returning its cash to investors through buybacks and dividends, which consumed over 100% of its free cash flow (FCF) during the first quarter. It expects to generate $7.7-$8.2 billion in FCF this year, compared to $8.8 billion in fiscal 2022, and to return "at least" $7.1 billion of that cash to its investors.
Lastly, Accenture's stock looks reasonably valued at 25 times forward earnings, and it pays a decent forward yield of 1.6%. It isn't a screaming bargain, but its stable revenue and profits, consistent buybacks and dividends, and long-term growth potential should all make it a safe stock to own as the bear market drags on.
Which argument makes more sense?
The bears are right about Accenture's near-term challenges, but investors who can tune out that noise should still consider buying Accenture today. Its stock won't bounce back to its all-time highs anytime soon, but it's still a high-quality company that will likely continue to grow for decades to come as more companies undergo massive digital transformations.
