Accenture: Riding the AI wave or drowning in its wake?
A test case on how human intelligence will fare in the age of artificial intelligence
Investment Brief
I started following Accenture closely several years ago, just in time to witness the company’s meteoric rise as businesses and governments raced to digitize business functions during the age of COVID and remote work, followed by the post-pandemic hangover in IT spending, and now the proliferation of AI and the associated risks and opportunities they present for Accenture. To be clear, I’m not an AI expert. No one is. Anyone claiming to see the future of AI is lying to themselves, and you. What we do know is that a small number of companies are spending aggressively on infrastructure to support AI ubiquity which has yet to fully arrive. What we don’t know is whether the benefits to individuals and businesses will be revolutionary enough to justify the trillions likely to be spent. Further question marks remain about the societal impacts of AI, including whether policymakers will be willing to endure significant white-collar job losses and skyrocketing energy prices as data centers gobble up massive amounts of power. So where does that leave Accenture? And what about the stock? I think it best to start at the beginning:
What does Accenture do? In simple terms, Accenture:
Provides advice and guidance to businesses and governments on how to improve their performance through the adoption of modern technology and processes—Accenture’s Strategy and Consulting service dimension
Effectuates change through the implementation, integration and maintenance of technology systems developed by Accenture or delivered in conjunction with the company’s world-class partners—Accenture’s Technology service dimension, commonly referred to as systems integration
Operates key business functions for clients unwilling or unable to do so in a cost-effective and high-performing manner—Accenture’s Operations service dimension, commonly referred to as business process outsourcing
What distinguishes Accenture? Its strong reputation, long-standing client relationships, expert workforce backed by significant investment, robust partner ecosystem, and comprehensive solutions all contribute to the company’s leadership position. Unlike competitors that specialize in certain functions, industries or geographies, Accenture excels across all, securing its role as a trusted digital transformation partner for top global corporations.
Note: Accenture’s claim of gaining market share among investable peers is likely true, but its organic revenue growth rate closely aligns with its largest competitors, suggesting limited market share gains within this group.
Where could AI disrupt Accenture? I believe consulting and business process outsourcing are the most at risk from disruption by AI:
Consultants specialize in drawing conclusions (hopefully the correct ones) from large datasets, similar to what large language models (LLMs) claim to do now and promise to improve upon in the future. It is not unreasonable to believe business leaders will increasingly rely on LLMs to inform their decision-making process, potentially displacing the work of human consultants.
Business process outsourcing involves rule-based, repetitive tasks. Autonomous AI agents may perform much of the work currently done by humans. Will Accenture deploy AI agents for tasks under outsourcing agreements, or will clients do this independently?
These areas (Strategy & Consulting and Operations) made up about one-third of Accenture’s revenue in FY24:
Disruption to systems integrators seems less clear, but still possible. Systems integrators, or SIs, specialize in seamlessly integrating a patchwork of hardware and software across an organization, and involves highly technical planning, design and engineering that relies on accrued expertise. It also involves a significant number of manual processes, such as inputting and transferring data. Potential disruption opportunities include:
AI-enabled applications are user-friendly and easier to integrate with existing technology systems, reducing the need for Accenture’s expertise
AI agents could eliminate manual processes, significantly reducing Accenture’s scope of work
Counterpoint: Businesses will increasingly rely on SIs that integrate AI, enhancing speed and reducing costs. If Accenture is able to do so, it could retain a significant portion of its revenue from systems integration.
The good news for Accenture?
There’s still time. Businesses are notoriously slow at embracing change, especially technology. Consider this from Accenture two years ago:
“For example, we estimate that only 40% of workloads are in the cloud today, only one-third of clients have modernized their ERP platforms and less than 10% have what we define as mature data and AI capabilities.”
Julie Sweet, CEO of Accenture, Fiscal Q4 2023 Earnings Call
And from one week ago:
“It is well recognized that advanced AI has taken the mind share of CEOs, the C-suite and boards faster than any technology development we’ve seen in the past two decades. At the same time, as reported widely, value realization has been underwhelming for many and enterprise adoption at scale is slow, other than with digital natives.”
Julie Sweet, CEO of Accenture, Fiscal Q4 2025 Earnings Call
Accenture is making progress. Accenture’s advanced AI bookings are growing rapidly but only made up 7.3% of the company’s total bookings in FY25, exiting at an 8.4% contribution rate:
One could view this a couple ways:
In the best-case scenario, data shows client adoption is gradual, and Accenture is ready to assist when it happens.
In the worst-case scenario, data shows AI-related investments, including hardware, cannibalizing traditional services spending. Gartner’s forecast predicts an 8% rise in IT spending for 2025, while Accenture reported 4% organic revenue growth in FY25.
Accenture is actively investing in AI, both organically and inorganically. The company now employs 77,000 AI and data professionals, up from 40,000 two years ago. Additionally, Accenture is integrating AI across its organization to enhance efficiencies in corporate functions and delivery models.
Meaningful preparation is required. Accenture believes most clients need total digital transformation to implement AI at scale. Digital transformation, Accenture’s specialty, involves migrating data to the cloud, implementing modern applications like enterprise resource planning (ERP) systems, digitizing workflows for employees and customers, and ensuring robust security and observability. A digital core enables easy access to company data, the key ingredient for AI.
Small language models could become more prominent. While LLMs like ChatGPT have gained popularity in the early AI era, small language models, or SLMs, may become more prominent as computing costs fall. SLMs use fewer parameters, are cheaper, and suit narrow use cases with proprietary data. I believe SLM adoption could benefit Accenture because:
The largest corporations, Accenture’s core clients, are most likely to adopt them due to their resources and vast data
Accenture may have a role developing and maintaining SLMs for clients, if they choose to develop them
Accenture could develop their own SLMs and lease them to clients, generating recurring revenue
Buying opportunity or value trap?
Accenture generates significant free cash flow, has $6.3 billion in net cash, and employs shareholder-friendly capital allocation policies, including consistent share repurchases and a growing dividend.
Organic revenue growth averaged 7% over the past decade, with expanding margins contributing to 10.5% compound annual EPS growth.
Despite its track record, Accenture trades at a significant discount to its historical averages and the overall market, due largely to AI disruption concerns, in my opinion. I note weakness in Accenture’s Federal Services business due to U.S. government austerity and reduced spending on discretionary IT projects as temporary headwinds.
So, is this a buying opportunity? Or value trap? To answer that question, I’ll outline a few possible scenarios:
Absence of AI: My first scenario contemplates a world without AI (hard to believe but humor me) and serves as a baseline to gauge other outcomes. Key assumptions include:
Organic revenue growth averaging 5.1% through FY35
Adjusted operating margin reaching 16.7% by FY35, up 110 bps versus FY25
Depreciation of fixed assets and capital expenditures averaging approximately 1% over my forecast period
Output: A $317 fair value for Accenture, implying 30% upside.
Bullish Scenario: My bullish scenario assumes companies undergo significant, time-consuming preparation before implementing an enterprise-wide AI strategy, boosting Accenture’s near-term revenue growth due to numerous digital transformation projects. Although AI disrupts Accenture’s traditional services, it creates new revenue opportunities, including developing and maintaining client SLMs and recurring revenue from leasing Accenture’s proprietary SLMs. Consequently, Accenture’s capital expenditures are elevated. Key assumptions include:
Organic revenue growth averaging 6.4% through FY35, with high-single-digit growth through FY30, moderating to mid-single-digit growth by FY35
An adjusted operating margin of 15.8% in FY35, little changed versus FY25
Depreciation of fixed assets and capital expenditures reaching 2% by the end of my forecast period
Output: A $337 fair value for Accenture, implying 38% upside.
Neutral Scenario: A neutral scenario assumes companies undergo significant, time-consuming preparation before implementing an enterprise-wide AI strategy. However, AI displaces Accenture’s traditional services to a greater degree, offsetting new revenue opportunities, including developing and maintaining client SLMs and recurring revenue from leasing Accenture’s proprietary SLMs, which cause the company’s capital expenditures to increase. Key assumptions include:
Organic revenue growth averages 4.1% through FY35, with mid-single-digit growth through FY32, declining to low-single-digit growth by FY35. I assume a 3% terminal growth rate, compared to 4% in my bullish scenario
An adjusted operating margin of 15.4% in FY35, down 20 bps versus FY25
Depreciation of fixed assets and capital expenditures reaching 2% by the end of my forecast period
Output: A $250 fair value for Accenture, implying 3% upside.
Bearish Scenario: My bearish scenario assumes companies undergo significant, time-consuming preparation before implementing an enterprise-wide AI strategy. However, AI significantly disrupts Accenture’s traditional services, including consulting and business process outsourcing, overwhelming new revenue opportunities, including developing and maintaining client SLMs and recurring revenue from leasing Accenture’s proprietary SLMs, which cause the company’s capital expenditures to increase. Key assumptions include:
Organic revenue growth averages a 0.5% decline through FY35, with absolute revenue falling by 7% from FY26 through FY35. This contemplates an approximately 25% decline in Accenture’s consulting and business process outsourcing service dimensions. I assume a 2.5% terminal growth rate, compared to 4% in my bullish scenario, and 3% in my neutral scenario
An adjusted operating margin of 14.8% in FY35, down 80 bps versus FY25
Depreciation of fixed assets and capital expenditures reaching 2% by the end of my forecast period
Output: A $171 fair value for Accenture, implying 30% downside.
Conclusion: My neutral scenario yields a fair value for Accenture close to its current share price, making an investment a coin flip with significant upside in a bullish scenario and downside in a bearish one. I don’t like coin flips, especially in investing, so I’m steering clear of Accenture at current prices. My confidence in predicting AI’s future is low. As more evidence emerges, I’ll reassess, but for now, Accenture’s share price reflects my view of its risks and opportunities.
Disclosure: I do not hold a position in Accenture or any of the other stocks mentioned in this article. This report is for informational purposes only and is not a recommendation to buy or sell any stock. Finally, while I rely on the information in this report to guide my investment decisions, you should not, because I cannot guarantee its accuracy.
Thanks for sharing! Really good overview of the current situation. I especially liked the fair value calculation, the assumptions behind it, and how that led to your decision.