Accenture Outshines Peers In Burgeoning Market

| About: Accenture plc (ACN)

Summary

Emerging technology business growth driving profitability.

Slowdown in traditional application development business may lead to price wars in the industry.

Recession in Europe may provide a major opportunity for ACN.

Businesses' growing interest in adopting emerging technology solutions in the cloud and analytics space alike is helping Accenture (NYSE:ACN) drive above-industry-average revenue growth. The company has recorded an average revenue growth of 11% on a constant currency basis in the past 6 quarters, with consulting, rather than outsourcing, driving revenue.

ACN's consistent performance has allowed it to outsmart its competitors and grow its market share significantly. With around 70% of its resources located in low-cost geographies, the global delivery network model allows it to record robust margins and provide low cost solutions.

Increasing demand for digital services driving top-line growth

Amid the global economic glut, the need to make businesses swift, regulatory-compliant, and remotely accessible is driving clients' demands for innovative solutions in analytics, cloud, mobile and social. The rise in demand for digital services has been pushing Accenture's revenue consistently higher (on constant-currency terms) since 2014.

Adoption of emerging technology solutions will drive Accenture's margins

The company has delivered stable operating margins in the past few years. While there is a challenge to minimize the fluctuations in operating profit growth amidst increasing pricing pressure from traditional IT services, the company's focus on moving its delivery centres to low-cost emerging economies and shifting focus on selling digital services (like cloud solutions, analytics, and mobility) could help it mitigate the impact of decline in margins due to the competition emanating from the outsourcing and traditional IT support segments.

ACN's history proves that the company has always tried to be proactive in dealing with changes and has always been an early adopter of emerging changes in the technology sector. Be it the decision of investing billions to create low cost centres in emerging economic geographies to being one of the earliest adopters and propagators of emerging technology solutions in the field of cloud, mobile and analytics, the company is leaving no stone unturned to ensure robust and sustained growth.

Businesses moving towards the app platform driving growth in the industry

As businesses move towards adopting mobile devices as the preferred mode to allow clients and employees to access enterprise data and applications, corporations are spending more money to extend services to mobile platforms, and it is benefitting IT solution providers like ACN, which are helping clients make this transition while ensuring data security and integrity issues are well managed.

IT services providers are helping clients in this transition and ensuring that corporate data remains secure on personal devices. The mobile applications are also becoming a key point of client engagement.

Businesses shifting the focus of their IT budgets from infra spending to emerging technologies

SMAC technology adoption is attracting greater spends as compared to areas such as building IT infrastructure and the trend is expected to continue in 2016. The shift is clearly evident as IT solution providers with greater focus on selling SMAC solutions are recording above industry growth as compared to peers with higher exposure in the infrastructure outsourcing space.

Recession-hit Europe: a major growth driver for Accenture

European firms are looking at ways to reduce non-core expenses to make their businesses sustainable amidst the ongoing economic crisis. The recession has led to these companies trying to shave its expenses leading to creation of opportunities for IT solutions providers find Europe as a major growth driver for its outsourcing and emerging technology solutions.

Accenture is recording faster growth in market share than peers like IBM (NYSE:IBM) and HP (NYSE:HPE)

Accenture's early entry in the emerging technologies space has given it a clear edge over its other major competitors and has led to ACN recording faster growth in comparison to rivals IBM and HP. With clients seeking to outsource IT functions to low costs locations, the company's move to open delivery centres in India and the Philippines gives ACN a competitive edge over its rivals in acquiring clients. Moreover, ACN's move into the emerging technology business of providing SMAC solutions has allowed the company to record organic growth and expand its operating margin.

Traditional IT services businesses will see a price war

Decline in demand for traditional ERP application development and implementation business may lead to a price war this year as solution providers look for ways to maintain market share. The decline could result in the entire industry reeling under a slowdown despite growing demand for the emerging SMAC technologies.

The slowdown, however, provides the opportunity for consolidation in the sector and acquisition of valuable targets, fueling M&A activity.

Final words

ACN has played its cards really well so far. Its entry and ability to create value in the emerging technology space is a great opportunity to consistently beat peers and record healthy top line and margin growth. I rate the company a definite buy and a solid pick for your portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.