Should Investors Bet on Accenture’s $3 Billion AI Gamble?
Accenture (ACN) announced on June 13 that it would invest $3 billion over the next three years in integrating artificial intelligence (AI) technology into its client’s businesses.
“There is unprecedented interest in all areas of AI, and the substantial investment we are making in our Data & AI practice will help our clients move from interest to action to value, and in a responsible way with clear business cases,” said Julie Sweet, chair and CEO, Accenture.
As part of its financial commitment to AI, it will double its AI talent to 80,000 employees over the next three years through a combination of new hires, acquisitions, and internal training. Its AI-focused staff currently account for over 5% of its 738,000 employees worldwide.
While $3 billion is significant, if the company makes no other hires besides those in AI, the AI talent will still only account for 10% of its overall workforce.
So, the question investors are faced with is whether this announcement is a big deal or just an opportunity to spotlight the company when AI anything gets a lot of traction.
I think it’s a big deal. Here’s why.
This Isn’t Accenture’s First AI Rodeo
Accenture stated in its press release that AI had been a part of the company's operations for over a decade.
“The investment builds on Accenture’s decade-plus leadership in AI. The company’s AI expertise spans more than 1,450 patents and pending patent applications worldwide and hundreds of client solutions at scale, ranging from marketing to retail and security to manufacturing,” Accenture’s June 13 press release stated.
“Accenture has embedded AI across its service delivery approach, driving efficiency, insights, and accelerating value for thousands of clients through its market-leading platforms such as myWizard, SynOps, and MyNav.”
A big focus of its efforts will be on generative AI and its AI Navigator for Enterprise platform. ChatGPT might have a lot of kinks to be worked out, but there is no question that it has sparked a movement to automate the more mundane and taxing processes currently performed by humans.
As consultants, Accenture is paid handsomely by its clients to help them complete complex tasks on time and within budget. It understands the human element that goes into operating any business, which makes its decades of consulting experience come in handy as the world evolves.
Rather than worry they will be displaced due to AI, Accenture has a big part to play in helping clients successfully transition to this new business environment.
McKinsey senior partner Alex Singla recently discussed the role of AI in management consulting.
“When I started at the firm, I’d spend an entire weekend just getting swamped reading document after document. Now A.I. models can synthesize the 10 key things you need to know within minutes. That’s a major, major shift,” Singla told the Observer in early June.
As Singla explained, AI is unlikely to eliminate the need for human problem-solving, analytical thinking, creativity, and change management.
“For any business, technology is usually not the real challenge, it’s the people component that slows things down,” Singla told the Observer. “That’s where I think management consulting still has a major role to play.”
Accenture is not new to AI. It’s been using AI for years. By doubling the size of its AI talent worldwide, it is ensuring that it can provide consulting services that are both technologically advanced but also peppered with the right amount of human analysis and understanding of an individual business’s unique situation.
Teaching clients how to use AI to generate business cases is a valuable commodity that companies of all sizes will likely embrace.
AI should be a significant revenue driver for Accenture in the next decade.
Is ACN a Buy at Current Prices
According to Barchart.com data, Accenture’s stock is trading at 3.2x sales, 27.7x its trailing 12-month earnings, and 25.2x its fiscal 2024 earnings per share estimate of $12.51.
According to its proxy report, publicly traded competitors include Aon (AON), Cognizant Technology Solutions (CTSH), and Marsh & McLennan (MMC). The three have average P/S, P/E, and forward P/E ratios of 3.8x, 22.5x, and 20.0x, respectively.
Admittedly, there aren’t many comparables as Mckinsey and Bain & Co. are privately owned. Based on these three peers, Accenture is more expensive. Sometimes, however, you pay what you get for.
Through Q2 2023, Accenture has a trailing 12-month free cash flow of $9.1 billion [cash flow]. Based on a market cap of $198.7 billion, it has a free cash flow yield of 4.5%. I consider anything between 4% and 8% to be in fair value territory. It's relatively inexpensive compared to where it traded at the end of 2021 -- above $414.
The 18 analysts from Barchart.com data give Accenture a Moderate Buy rating (4.11 out of 5) with a mean target price of $313.12, about where it’s currently trading. So, analysts don’t see much movement over the next 12 months.
A big downside to Accenture’s push into AI is that it comes at nearly the same time it cut 19,000 jobs in March to right-size its non-revenue-generating departments -- human resources, finance, legal -- which does make one wonder if the cuts were done to help pay for the $3 billion investment.
I want to think not.
Despite the poor optics, Accenture’s $3 billion gamble is worth betting on for the long haul.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.