Over the last six months, Accenture’s shares have sunk to $320, producing a disappointing 9.3% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Accenture, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Accenture Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why ACN doesn't excite us and a stock we'd rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within business services, a stretched historical view may miss new innovations or demand cycles. Accenture’s recent performance shows its demand has slowed as its annualized revenue growth of 3.1% over the last two years was below its five-year trend. 
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Accenture’s margin dropped by 5.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Accenture’s free cash flow margin for the trailing 12 months was 13.6%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Accenture’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Accenture isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 24.9× forward P/E (or $320 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. We’d recommend looking at a top digital advertising platform riding the creator economy.
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