Accenture’s (ACN) valuation could compress in the medium term amid decelerating cloud growth, longer-than-projected time for revenue contribution from generative artificial intelligence, and higher spending on acquisitions, Morgan Stanley said Wednesday.
The brokerage downgraded its rating on the consulting firm’s stock to equal-weight from overweight and reduced its price target to $300 from $382, saying it no longer sees the stock as “relatively attractive.” Morgan Stanley said investor expectations have “largely come down” across the information technology services sector.
Accenture shares were down 1.1% ahead of market close on Wednesday.
“While overall cloud growth has directionally trended downward, albeit marginally, the hyperscalers are still expected to maintain high double-digit cloud growth in (2024), which is partly driven by AI-related spend on cloud services,” the brokerage wrote. On the contrary, Accenture’s management has highlighted three straight quarters of normalization in cloud growth, according to the note.
“With minimal to no improvement in the discretionary spending environment, we expect (Accenture’s) cloud growth will increasingly diverge from that of the hyperscalers,” the brokerage wrote. Although the company’s ongoing commitment to invest in generative AI places it “at the forefront of innovation,” the time needed to scale the technology at the enterprise level could take it longer than estimated.
A “challenged” macroeconomic environment makes it tough for generative AI-based revenue to outweigh cyclical challenges for the company, according to the note. Accenture is unlikely to see a boost in near-term revenue growth from generative AI as majority of its engagements are still in the proof-of-concept stage. The brokerage said only 30% of the company’s proof-of-concept projects are proceeding to production.
Morgan Stanley expects the company to continue to allocate “a meaningful portion” of free cash flow towards mergers and acquisitions in 2025. “While we believe portfolio company growth rates are above that of (Accenture’s) at time of acquisition, we monitor (Accenture’s) ability to sustain or accelerate growth in a tightening budgetary environment,” the brokerage wrote.
Earlier this month, the company announced leadership changes, including a new chief financial officer. Morgan Stanley said the changes are likely to bring “at least modestly elevated levels of uncertainty,” particularly in an ongoing weak and changing demand backdrop.
Last week, Accenture tightened its full-year revenue outlook on the back of lower-than-expected fiscal third-quarter results. The brokerage lowered its 2024 earnings and revenue outlooks to $11.96 per share and $64.94 billion, respectively, from $12.12 and $65.47 billion. It also cut its 2025 EPS and revenue expectations to $12.48 and $67.54 billion, respectively, from $12.73 and $68.08 billion.
Slower venture capital investment, which Morgan Stanley sees as a leading indicator for services demand, could also drive Accenture’s valuation compression in the medium term. “We expect overall IT services demand is likely to be generally slower than expected in coming quarters and await an inflection in client spending intentions in order to get more constructive,” the brokerage said.