Accenture PLC - Class A

In our opinion, most enterprises are going to need help making the transition from their old business models to new processes where AI is deeply embedded. And there is no company in the world that we believe is better positioned to help them with this pivot than Accenture, so we bought you some this quarter as the stock sits at multi-year lows. Fears over AI automating away the need for consultants have compressed Accenture’s valuation to a very attractive 9x earnings and 15% free cash flow yield. If our thesis is correct and AI creates a large wave of implementation opportunities, the shares should do extremely well.

Accenture's recent stock decline was driven by fears of AI disrupting demand for IT services, leading to a reduction in their booking growth estimate. However, we believe this reaction was a severe overreaction. Accenture possesses strong domain expertise and customer relationships, positioning it as a key partner for companies transitioning to leverage AI in their operations. We see an opportunity to acquire Accenture at a compelling valuation, with a free cash flow yield of seven times, making it an attractive investment.

Accenture, the world's largest IT services firm, is well-positioned to benefit from the ongoing AI transition due to its focus on consulting-led transformation work that combines business expertise with engineering. This unique positioning allows Accenture to earn a premium, reflected in its revenue per employee of approximately $90,000, which is nearly double that of India's largest outsourcing firms. The firm is expected to adapt and become an enabler of AI adoption rather than a victim of it, as it has little exposure to the commoditized application development that AI automates first. The market has undervalued Accenture, pricing it as if it were in terminal decline, while we believe it can thrive in the evolving landscape.

Our investment in Accenture over the last few years has been a costly mistake. Its share price declined by 58% over the last 12 months, negatively impacting portfolio returns for the year by 5.2%. We misjudged Accenture’s underlying revenue growth, assuming it would return to the 6–7% rate it achieved from 2011 to 2019. However, revenue growth since 2024 has been stuck at around 1–4%. Management's guidance for slowing growth next quarter and their plan to spend around $9 billion on acquisitions at high valuation multiples further undermined our confidence. We were too patient and not sensitive enough to warning signs over the last couple of years that challenged our assumptions.

We exited our long-held position in Accenture. We think Accenture remains an excellent business with strong competitive advantages, but revenue growth has been modest and below our expectations for roughly the past year as discretionary IT budgets remain under pressure. We believe the company can reaccelerate over time, particularly as enterprise customers move from AI experimentation to broader implementation. However, that transition is taking longer than we expected. In the current market environment, where timing and business momentum matter more than they have historically, we believe the opportunity cost of continuing to wait has increased.

Accenture, along with Cognizant and Globant, is priced at four and a half times or less of our estimate of normal earnings due to fears that AI will erode demand for outsourced technology work. We believe the market has overreacted, and a more likely outcome is that these firms will adapt and become enablers of AI adoption rather than victims. Accenture's consulting-led transformation work positions it favorably, as it combines business expertise with engineering, allowing it to maintain a premium revenue per employee of roughly $90,000, nearly double that of India's largest outsourcing firms.

Accenture's stock declined over 30% during the quarter, primarily due to a reduction in guidance that overshadowed otherwise solid results. Reported quarterly bookings of $19.3 billion were marginally below the prior year's $19.4 billion, raising concerns about the sustainability of demand at a time when investor expectations for AI-driven consulting growth are high. The guidance reduction was mainly driven by a slowdown in U.S. federal government business, which has introduced questions about the durability of the company's near-term growth trajectory.

Accenture was one of the Fund’s top detractors in the quarter, with a significant decline of -36.69%. The company, along with others in the software and information services sector, faced challenges as investors grappled with the potential impact of AI on various business models. Despite the material trims made during the quarter to limit portfolio impact, we continue to believe that Accenture offers attractive upside from current prices, indicating a cautious outlook on its future performance.

Accenture was among the Fund’s top detractors for the quarter, with results, bookings, and outlook that were mildly below expectations. The stock price reaction was swift and more severe, leading us to believe that the initial price decline was overdone. We are closely monitoring ongoing developments regarding Accenture as we assess its future potential in the context of the broader market dynamics, particularly the impact of AI on business models.

Accenture was one of the Fund’s top detractors in the quarter, with a return of -36.69%. The company, along with others in the software and information services sector, faced challenges as investors grappled with the potential impact of AI on various business models. Despite the negative performance, the manager believes that Accenture still offers attractive upside from current prices, indicating a cautious outlook on its future potential.