Accenture Rides On Cloud Strength & Buyouts, Competition Rife

Accenture plc (NYSE:ACN) is witnessing strong demand for its services owing to solid performance across its insurance, banking and health care segments.

In the second-quarter fiscal 2018, the company performed exceedingly well. Non-GAAP earnings (excluding the effect of US tax law changes) of $1.58 per share, outpaced the Zacks Consensus Estimate by 8 cents and improved 18.8% year over year. Also, revenues increased 15% year over year to $9.6 billion and surpassed the consensus mark by 3.2%.

Furthermore, the company’s surprise history has been impressive as it surpassed the consensus mark in each of the trailing four quarters, delivering a positive average earnings surprise of 3.8%. For the fourth quarter, the consensus estimate moved down 1.7% over the past 30 days.

Notably, shares of Accenture have gained 28.4% in the past year, significantly outperforming the industry’s 24.1% rally.

Acquisition is a Key Growth Strategy

In fiscal 2017, Accenture closed 37 acquisition deals worth $1.7 billion. So far this year, the company has either closed or is in the process of acquiring five businesses. Over the last three fiscals, Accenture has invested approximately $3.4 billion in acquiring nearly 70 companies or start-ups.

For fiscal 2018, the company anticipates to invest close to $1 billion on acquiring assets. This is because acquisitions have enabled Accenture to enter new markets, diversify and broaden its product portfolio, and maintain its leading position. Going ahead, such buyouts are expected to contribute significantly to the company’s revenue stream.

Accenture PLC Revenue (TTM)

Cloud Offers Huge Opportunities

Accenture’s strategy of enhancing its cloud capabilities through acquisitions and partnerships should benefit the company. This is evident from the recent forecast by several independent research firms. According to a research firm, Gartner, the public cloud services market is likely to witness a compounded annual growth rate (CAGR) of 16.3% during the 2016-2019 period, reaching $383.4 billion by 2020 end.

In fact, we believe that exponential growth in the amount of data, complexity of data formats and the need to scale resources at regular intervals compelled several companies to turn to cloud-computing vendors. Therefore, considering the growing need for cloud-based applications and software, Accenture’s investments in this space are anticipated to propel long-term growth.

Strengthening Digital Marketing Capabilities

Accenture has strengthened its digital marketing capabilities through some significant acquisitions, including Reactive Media, Acquity Group Ltd., dgroup and OCTO Technology. Again, the company inked a deal to acquire New York-based digital agency, Meredith Xcelerated Marketing, last month.

Accenture Interactive is a well-integrated platform, enabling CMOs to devise marketing strategies and derive higher ROI (return on investment) from it. Considering the growing need for digital marketing, we expect Accenture’s investment in digital and marketing capabilities to boost its long-term growth. This will also facilitate the company in effectively competing with other digital marketing service providers such as IBM (NYSE:IBM), Deloitte and Dell.

Increasing Competition and Integration Risks

Although acquisitions improve revenue opportunities along with business mix and profitability, it adds to integration risks as well. Moreover, frequent acquisitions are a distraction for management, which might impact organic growth moving ahead.

Further, competition from companies like Genpact (NYSE:G) , Cognizant (NASDAQ:CTSH) and Infosys (NYSE:INFY) is a mounting pressure. In fact, competition is particularly tough in the case of resurgent regions like Europe, since all the major players are fighting for business. This naturally increases pricing pressures.

Zacks Rank

Accenture carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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