In its earnings release, the company highlighted significant new engagements at blue-chip clients such as BP
The IT consulting business is inherently a good business. The business model is simple -- all consulting ultimately boils down to "renting out" smart people on a project basis. It doesn't require much capital, and once basic fixed costs are covered, it provides good operating margins. Barriers to entry are high, as the business is based on long-standing customer relationships and high-caliber consultants, both of which are difficult to develop.
However, the business does not provide opportunities for extraordinary economic returns, unlike some other parts of the broadly defined IT industry, which have "winner-take-all" characteristics driven by network effects (one "standard" naturally emerges in the industry). The classic example is operating systems software, as Microsoft
At the height of the Internet bubble, IT consultancies were valued as if the business model shared some of these characteristics. At that time, previously unknown firms like Scient, Viant, and Razorfish boasted multi-billion market capitalizations and traded at huge multiples of revenues. Sapient stock traded as high as $140 in 1999 and 2000. The firm's 52-week range now is $1.89 to $7.33, and shares are currently trading at $5.79.
In addition, the growth rate of consultancies is limited by the fact that the business hinges on the quality of its people, and that it simply takes time to hire and train good people. Lastly, as was recently argued in a Harvard Business Review article titled "IT Doesn't Matter," IT's importance as a strategic differentiator may be diminishing -- like electricity, IT may become a ubiquitous piece of a company's infrastructure, but it will no longer be a source of competitive advantage.
Even with its stock price down to $5 to $6, Sapient still trades at lofty multiples -- more than 3.5 times sales, in contrast to Accenture, which trades at 1.6 times sales. While survival is no longer an issue for Sapient, the current valuation still reflects remnants of delusions from the Internet bubble. The stock still has quite a bit of room to fall before it is in line with a valuation that accurately reflects the inherent characteristics of a consulting business.
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Fool contributor Salim Haji lives in Denver, Colo. He does not own shares in any of the companies mentioned.