Up 16% This Year, Accenture Stock Headed Back Down?

Accenture stock (NYSE: ACN) is up 16% since the beginning of this year, but at the current price of $243 per share, we believe Accenture stock has a significant downside.

Why is that? Our belief stems from the fact that Accenture’s stock remains about 65% higher than the low seen in early 2018. Our dashboard What Factors Drove 65% Change In Accenture Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The rise over the past 2 years is justified by the 20% growth seen in Accenture’s revenues, which translated into a 39% growth in Net Income, owing to lower operating expenses. Despite the outstanding share count rising 3%, this led to a 35% jump in earnings per share (EPS).

Finally, Accenture’s P/E ratio rose from about 26x at the end of 2017 to 28x at the end of 2019. While Accenture’s P/E has risen to over 32x now, given the volatility of the current situation, there is possible downside for Accenture’s multiple when compared to levels seen in the past years – P/E of 26x at the end of 2017, and 28x as recently as 2019.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus, and the resulting economic slowdown means that a lot of businesses are looking to cut costs wherever possible. Accenture is in the business of technology consulting and this could hamper their revenue as businesses could cut back on outsourcing activities. This will hurt their business from existing clients and could also lead to a drop in new bookings. We believe Accenture’s Q4 2020 results in September will confirm the hit to its revenue and could also accompany a lower 2021 guidance.

Regardless, if there isn’t clear evidence of containment of the virus by the time of the earnings announcement, we believe the stock will see its P/E decline from the current level of 32x to around 28x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $200.

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