MWelsh
Accenture (NYSE:ACN) stock dipped ~2% on Friday after TD Cowen downgraded the Irish company’s shares to Market Perform from Outperform, noting additional deterioration in demand signals which is causing incremental uncertainty and estimate risk.
The firm’s analysts said that Accenture remains a Services staple with unmatched scale and diversification, however its valuation seems full following recent outperformance linked with generative AI enthusiasm despite limited NT return.
The firm added that it sees a less favorable risk/reward scenario and reduced its price target on Accenture’s shares to $300.
The analysts noted that reasons for near-term upside were hard to imagine amid multiple cautionary demand signals. The company’s bookings outlook for Q4 is muted (flat Q/Q implies down MSD Y/Y), NT billable hiring is almost flat, S&C uncertainty persists with some pricing compression, and other areas of moderation have become more prevalent, namely short-cycle S&C and systems integration work which now extends beyond N. America.
The analysts added that strength in Operations — which has been a source of strength — is expected to decelerate a bit in Q4 to HSD versus DD growth in Q2/Q3. Collectively, the analysts think this sets up a more conservative starting point for FY24. Weakness could be short-lived, but there is also more potential downside if the uncertain macro continues.
The firm noted that Accenture’s Valuation has benefited from large cap tech stocks gaining and perceived generative AI tailwinds, however materiality in the NT is not likely enough to offset clients’ broader caution considering caution linked to the macro scenario.
GenAI prospects are exciting, but over the coming six months the analysts do not think it helps with the results and thus were moving to the sidelines.
The analysts believe that shares are likely rangebound and fear the potential for multiple compression if generative AI optimism fades or the softer landing scenario does not come to fruition.
The analysts see an unfavorable risk-reward in shares with a higher multiple that they believe is not adequately discounting decelerating medium-term organic growth path and the uncertainty on the near-term demand environment for IT services.
