Technology And Consulting To Drive Accenture In 2023
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Summary:
- Accenture to benefit from strong technology consulting demand in Asia-Pacific.
- The order book remains strong.
- Valuations are reasonable all things considered.
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Investment Thesis
Accenture plc (NYSE:ACN) is increasingly dependent on its consulting business in order to drive revenue, and with the global economy continuing to slow down, questions remain about whether Accenture can maintain its momentum. Should there be a slowdown, the current valuation, where the price-to-earnings is where it is might come under pressure, and the stock could retreat slightly.
Consulting Remains Key to Revenue Growth in 2023
One of the factors that might affect Accenture in 2023 is the company’s dependence on consulting, specifically the technology subset of consulting, and it’s also where the momentum lies. The division has become increasingly important to Accenture’s business, and now almost makes up as much revenue as managed bookings. But is also more susceptible to slowdowns, as consulting spending from companies tends to decrease during global slowdowns. Considering that it is very likely the global economies become slower during the latter part of the year, as the effects of higher interest rates continue to remain high, Accenture might be headed for a slight retracement.
While Accenture has not rested on its current business and has continued to expand its offering, largely through acquisitions in recent times, the company still faces a number of headwinds, mainly a global economy, which is slowing down. Management has been focussing on a couple of different major sectors mainly technology and IT, especially Cloud, Data, and Security consulting, as they look to continue their momentum going into the next few years. Spending in these areas is expected to remain relatively steady in 2023. Source (1,2)
In general Accenture’s businesses, i.e. both consulting and managed services are relatively well spread out across industries, which should help it weather some of the issues. Cloud spending in 2023 is expected to grow to around $550-600 billion growing by around 20% in 2023. And cyber security spend is expected to grow around is going to grow around 11%, to around $188 billion. This should help Accenture continue its momentum as it looks to play a key role in technology consulting. Both these segments require large amounts of capital expenditure, and Accenture continues to play a key role in offering advice to those who may not know how to wade through the complex world of technology integration.
Japan to Help Drive Revenue
Geographically speaking, Accenture will continue to focus on emerging markets, and growth markets to drive revenue. Japan has emerged as a key market within the growth market for Accenture as it has looked to maximize its revenue. Japan has a lot of legacy industries that need a turnaround, and Accenture has been increasingly playing a key role in helping improve business processes in the region in order to get Japanese companies to modern levels of efficiency. Therefore, the base effect of Japan, where there are still large amounts of room to grow, should help Accenture with significant business in 2023. Japan has historically been a place that has not always invested in technology and therefore is now looking to quickly get businesses to modern levels.
In addition, Accenture has done well to improve its consulting offering in the health & services area. This should also help growth, as the sector is relatively resilient to global economic volatility. The segment grew by 15%, during the latest quarter, and the company will be looking to it to continue the momentum in 2023.
In general, Asia-Pacific remains a key growth market, with the likes of China, Indonesia, and even Australia should help Accenture with marginal revenue. As more and more companies look to integrate key technology Accenture remains at the center of this push, providing key consulting advice to large companies. The general momentum bodes well for the company, despite slowing growth elsewhere.
Meanwhile, the two traditional markets US and Europe which are showing greater signs of slowing down will affect Accenture’s revenue in a negative fashion. While Europe and US continue to struggle a bit more, Accenture is increasingly looking to growth markets in 2023, in order to stay afloat during these times when global growth is slowing. This means that while the US continues to see slower growth, and Europe slows down Asia-pacific will help push revenue towards a higher rate. Growth came in at around 9% during Q2, showing that things have not slowed down as much as expected.
Furthermore, within its consulting niche, Accenture remains relatively preferred compared to other consulting firms, which means there should continue to be a strong order flow regardless. The brand identity, and the fact that the company continues to be a key player in consulting, especially technology consulting, should help continue with growth.
Margins to Remain Flat
Margins are expected to remain around the same as they are currently with operating margins currently around 13.8%. It could be margins continue to increase slowly in the future as consulting becomes a larger part of the company’s total revenue. This could send margins towards 15%. But this is still likely a few years away as consulting and technology part of the business continue to make up a larger part of the business.
Should revenue grow around 7%, in 2023, mainly as the global economy slows, the company’s revenue will grow from around $61 billion to around $65 billion, if it grows by the current rate, which is 9%, it will grow to around $66.5 billion. This would mean a net profit of around $9-9.2 billion in 2023. This would put the forward P/E around 19-20x, which would be acceptable to investors. At this point, a potential 5-10% correction is possible mainly owing to rising interest rates, which are expected to rise potentially to around 6%.
As a result, 2023 could continue to see relatively acceptable returns, albeit potentially lower than the usual 10-12% Accenture witnesses, especially if investors continue to put the premium that they are currently placing on Accenture. This is assuming that spending remains within predicted the by in Cloud and IT, (links provided earlier), leading to revenue to continue to grow around 9% in as it did in the second quarter.
Alternatively, should consulting orders slow down, which could be likely considering the global economy is slowing, the premium might come down.
Global spending remains the biggest risk to Accenture as a consulting firm, although the long-term prospects remain relatively steady. Investors will continue to wait and watch most likely, how the market turns, but If Accenture can continue to grow at a pace that is acceptable the stock could go up another 10-12%. But Accenture is not a quick-growing company and will grow at a relatively steady pace if it does.
Accenture remains a relatively safe blue-chip company during these times, and investors will take solace from the fact that the company’s billing remains strong, with consulting and operating currently seeing 1.3 and 1.5 books to billing respectively, and a strong order book as it looks to get through what is likely to be a tougher year.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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