You'd be hard-pressed to find a company that doesn't want to integrate artificial intelligence (AI) into its systems. With both customer and internal demand for these products, it makes sense to investigate how AI can help a business succeed.
However, few companies have the expertise to develop and implement these products. That's where a consulting firm like Accenture (ACN -0.19%) comes in. With Accenture's team of experts, it can help integrate AI and many other popular solutions into a client's product or internal systems. Because of its leadership role, Accenture also makes a great investment. Read on to find out why Accenture looks like an outstanding stock to buy in this operating environment.
Accenture's business isn't currently at its best
As a tech consulting firm, Accenture has a wide range of specialties. Whether it's AI, cybersecurity, blockchain, edge computing, or even the metaverse, Accenture has a group of experts who can take your vision and turn it into reality. With nearly 750,000 employees, Accenture has an extensive and global reach that is unparalleled.
However, with the expensive nature of employing a consulting firm to enact changes, Accenture's business hasn't been doing as well lately. In the second quarter of fiscal year 2023 (ended Feb. 28), revenue was up 5% to $15.8 billion. Additionally, it expects FY 2023 total revenue growth to be between 8% and 10% in local currency (Accenture is based in Ireland). This guidance reflects an environment where businesses aren't willing to spend more on new projects due to economic uncertainty.
But what investors need to keep in mind is when that guidance was given: March 23. At that time, AI was gaining steam as a trend but may not have been as prevalent as it is now. Just look at the guidance Nvidia gave during its fourth quarter of FY 2023 on Feb. 27. It was still predicting negative revenue growth and made no mention of the astounding AI demand that was on the horizon. Then, on May 24, Nvidia divulged that it saw unprecedented demand for its AI-powering GPUs and predicted $11 billion in Q2 revenue, a 64% year-over-year increase.
While I'm not saying it's guaranteed, it makes sense that Accenture is likely seeing an increase in demand for its AI expertise because many clients don't have the in-house knowledge or resources required to roll out these solutions.
With that catalyst on the horizon, Accenture's stock looks attractive.
Accenture's stock is reasonably valued from a historical standpoint
Accenture's stock has always been expensive, as investors have given the company a premium due to its long-term execution. With steady share repurchases and a nice dividend yield (currently around 1.4%), it's one of those stocks many investors purchase and just forget about.
Because share repurchases and dividends are a crucial part of Accenture's investment thesis, we'll value the company using a price-to-free-cash-flow (FCF) ratio, as this figure gives a relative value based on its potential to perform capital return. Besides the spike in 2022, Accenture's stock looks to be trading in its usual valuation range between 18 and 24 times FCF.
ACN Price to Free Cash Flow data by YCharts.
Although Accenture has seen a run-up with the rest of the market in the past few months (Accenture's stock is up 16% over the past three months), the stock remains reasonably valued. Furthermore, this metric should drop to cheaper levels if AI demand boosts the company, as I'm expecting.
Accenture likely won't need to hire more employees to fulfill this demand, so any increase in revenue should make it straight to the bottom line. That will be a considerable boost to FCF and will make the stock look cheaper due to the denominator of the ratio increasing.
Even if this demand doesn't appear in Accenture's Q3, I'm still confident in the company long-term. It's a steady grower and has an excellent record of shareholder-friendly actions. With vast AI capabilities, it should also benefit from the AI rollout.
