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Accenture (ACN) Stock | NYSE: ACN

Covered by Stratosphere

Accent on the Future

Accenture PLC ("Accenture") is a global technology services leader in the business of providing professional services to virtually any industry in existence.

The name is derived from the phrase, "accent on the future", encapsulating all that the company would consider its raison d'etre.

It delivers premium consulting and outsourcing services to the biggest and most influential companies on the planet, seeking new ways of doing things and helping clients stay on top of the curve rather than fall behind.

Accenture is a high-quality business that sits in between change and the organizations that drive it. It is the communicator, advisor, and facilitator of change that has started to emerge but may not be visible to the public yet. Clients retain Accenture for its forward-thinking and ability to envision the future - the company tirelessly learns and invests tons of resources to make sure it delivers services clients will use tomorrow, not yesterday.

Stratosphere Score

9

Growth

5

Valuation

10

Quality

6

Margins

4

Dividend

8

Balance Sheet

10
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. Accenture is the most diversified player in the technology services space, providing services to 40 industries in regions worldwide.

  2. Accenture has among the strongest relationships with some of the largest companies in the world found in the Forbes Global 2000 list. These relationships offer immense leverage to win contracts time and again.

  3. Innovation is at the core of Accenture's value proposition. It boasts a global network of innovation hubs and delivery centres at which new concepts, ideas, prototypes, and technologies are created, tested, and implemented in partnerships with leading companies in their space.

  4. Financial strength is part of Accenture's identity - it allows the firm to return substantial capital to shareholders, reinvest in operations, and conduct plenty mission-critical acquisitions (as it has been doing) to beef up its expertise and service offerings as paradigms shift at an accelerating pace.

  5. The cloud and digital transformation trends are still in their infancy. These trends renewed double-digit top-line growth at Accenture and should uphold Accenture’s strong cash flows for the foreseeable future.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

The Relationship Advantage

Accenture's main competitive advantage stems from the long-term relationships it has developed with the world's largest and most influential companies, organizations, and governments. The company's sales are primarily derived from the Forbes Global 2000 entities, and it has partnerships with 97 of its top 100 clients for over a decade.

The company has 400+ such partnerships of which over 200 are technology partners and almost 200 are channel partners. These partnerships help Accenture push the limits of its service capabilities, spanning fields like cloud, security, hardware, IT, and more. Its long list of partnerships includes incredibly large businesses like Google, Apple, AWS, Cisco, CrowdStrike, Oracle, Salesforce, Snowflake, Workday, and plenty more.

Accenture leverages these relationships to create a "network effect" from which both sides - Accenture and the partner - equally benefit. Accenture and any given partner have mutual, non-competitive interests. Partners seek to place their services and / or infrastructure within an organization while Accenture implements the same services or infrastructure on behalf of its clients. These interests mesh well together and allow for reciprocity between the two sides. These tight relationships give Accenture an edge over competitors, especially smaller ones.

Patent (Innovation) Protection

As a firm that introduces new ideas, concepts, and innovation to the marketplace, Accenture is mindful that its biggest "edge" comes directly from the aggregate knowledge and expertise developed within the company. To protect its edge, Accenture seeks legal protection of this intellectual property ("IP") through a portfolio of almost 8,000 patents and pending patent applications worldwide.

By protecting its innovative solutions and IP, Accenture can rest assured that it will be exclusively delivering among the world’s best services to its clients with no worry of a competitor swooping in and offering the same services for a cheaper price. Patents do not protect IP forever, but they do give the firm enough time to flex its edge, win clients, and win repeat contracts with those clients.

When clients receive an exclusive service that ultimately drives value, as is the case with Accenture's services, the result is premium pricing power that clients are willing to pay themselves. Strong innovation and patent protection are some of the reasons Accenture is referred to as a premium brand in the professional services world.

Accenture's Delivery Network

It is great for Accenture to innovate in-house, but what is the value proposition of these efforts and how does Accenture ultimately deliver this value to clients?

Through its network of over 100 innovation hubs scattered across the globe, Accenture aims to be the first to identify a new or emerging market, technology, or industry trend. By being the first to a new concept, this directly translates to Accenture’s clients being among the first adopters of such ideas or methodologies.

Because Accenture does the work behind the scenes to ensure these new ways of doing business not only work but provide loads of value to the client by saving them money, making them more, or helping them accelerate important initiatives, clients place immense amounts of trust into Accenture to discover or create the next cutting-edge service or solution.

Accenture fosters this innovation through several avenues – Accenture Research, Accenture Ventures, Accenture Labs, Studios, Innovation Centers, and Delivery Centers.

Accenture Ventures partners with early-stage companies innovating in some of the most obscure emerging technologies the world has seen. Accenture gets to have an exclusive look into some of these new technologies and gets an "unfair" advantage over competitors by being able to start working these concepts and technologies into its engagements before its competitors even realize they exist.

Accenture Labs makes sure every new idea, technology, or concept is vetted before it hits the market. By researching and developing these projects with diligent care, Accenture can be confident it is delivering tons of value to its clients before any other competitor can.

Finally, Accenture's global network of innovation hubs and Delivery Centres help put it all together. In the words of Accenture itself, these locations "help clients imagine, build and scale for the future". With every major company being a stone's throw away from an Advanced Technology or Intelligent Operations Center in major economic hubs, Accenture helps get each client the talent they need to build and implement ground-breaking solutions quickly and at scale while speaking the same language as the client and working within the same time zone. Every minute and ounce of effort counts when one is revolutionizing the world - Accenture’s vast network speaks for itself in this regard.

Operating Leverage

Accenture operates a capital-light business model that becomes more profitable as it scales. Cost of services and sales and marketing costs as a percentage of total sales have been trending modestly downwards over the past decade. The company has operating leverage, which means that a higher proportion of sales dollars trickle down to the bottom line over time.

Operating leverage is a good thing. Although it does not contribute to long-term growth to the extent that good, pure revenue growth does, it is encouraging to see that Accenture has been able to keep costs tamed while the sales soar. Productivity is high and the company has clearly been delivering on its contracts. Combine pricing power with exceptional cost control, and you get Accenture.

Opportunities Ahead

  • Accenture is thriving from a concept it has coined as "compressed transformation", a trend that has been a significant driver of revenue growth and will continue to drive sales throughout the foreseeable future. We believe Accenture has an astronomically large runway as a firm in between global innovation and the companies reinventing themselves. As the implementer of unique solutions and services to firms that are eager to adopt new ways of doing things early, Accenture creates a positive feedback loop with the world’s strongest and best companies.

  • Corporate budgets appear to be flexible when it comes to Accenture’s services. As an investor, that is an encouraging sign. Accenture has been able to stay ahead of its competition to drive value for clients, leading to what seems to be a permanent operating expense for the world’s best and most innovative disruptors. Accenture has been hitting new records for bookings in the recent past. Demand is strong.

  • Accenture is a prolific acquirer. These acquisitions enable the company to expand its horizons by acquiring critical skills and capabilities in high-growing areas of the market that it may not otherwise have had. One could argue business acquisitions are discretionary; we believe they are necessary in this field to continue growing, developing, and getting a hold of the latest, obscure, high-upside innovation if a consulting and outsourcing firm wants to serve the world’s best disruptors.

Accenture - Sudden and Gradual Disruption GraphicSource: Accenture Compressive Disruption Presentation

Risks

Reliance on Corporate Budgets

Although we believe that Accenture services are deeply entrenched in yearly corporate budget approvals of some of the highest quality and most resilient companies and organizations the world has to offer, there is still a degree of risk in this regard. The past is no guarantee for the future - bookings increased during the COVID-19 pandemic, but this does not preclude Accenture from the risk of organizations slashing discretionary IT, modernization, cloud, and other consulting and outsourcing engagement around times of economic hardship.

Acquisition Risk

Accenture is acquiring companies at a pace that well-known serial acquirers perform. This naturally comes with execution risk from both a strategic and financial standpoint. Misidentifying solid opportunities could lead to strategic destruction and ultimately hurt the bottom line. The market for acquisition targets is also hot in a playing field with other massive players, like McKinsey, the Big 4 accounting firms, and other prominent professional services firms. Accenture runs the risk of overpaying for a company or a group of them and diluting the bottom line.

Pricing Power

Pricing power is a strength at Accenture, but it could also attract tons of competition and open lots of pricing downside if emerging players snag customers. Although we believe these smaller players do not boast the same network effects and relationship benefits as Accenture, they could possibly win contracts for niche digital purposes. For example, firms like Cognizant and Infosys are large and focus on digital transformation and IT solutions if they perform well in the client market and win repeat business.

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