Forget IBM: Accenture’s AI Momentum Is Your Next Buy

Key Points

• IBM and Accenture have both created substantial Gen AI businesses, but many have only tuned into the success of one so far.
• Accenture's $4.1 billion Gen-AI business is smaller than IBM's, but it grew 50% faster last quarter.
• Wall Street price target data is signaling downside potential for IBM while pointing to significant upside potential for Accenture.

For International Business Machines NYSE: IBM and Accenture NYSE: ACN, markets have reacted in starkly different fashion to the stories of these two Gen-AI consulting leaders. Both companies have built multi-billion-dollar Gen-AI businesses, but one stock has soared, while the other hasn’t. Over the past 52 weeks, IBM shares have provided a total return of approximately 76% as of the June 30 close.

Meanwhile, Accenture’s total return is approximately 0%. This divergence in returns has led Wall Street forecasts to see solid downside potential in IBM, while seeing notable upside potential in Accenture. Importantly, Accenture's Gen-AI business is growing considerably faster.

However, why has the stock been unable to capture gains like IBM, and why are analysts predicting that this can change?

Accenture’s Gen AI Book: Smaller, But Faster Growing Than Big Blue

IBM’s success in Gen-AI has been well documented. The tech company’s Gen-AI book of business grew to $6 billion from inception through March of this year. IBM achieved this over seven quarters, as the company started reporting this figure back in Q3 2023.

This implies average quarterly booking growth of around $850 million. 

Many may not be aware that Accenture has a sizable Gen-AI business. Through the three quarters ending May 31, Accenture’s Gen-AI book of business stands at $4.1 billion. This figure implies average Gen-AI bookings growth of nearly $1.37 billion per quarter.

Accenture’s Gen-AI bookings growth of $1.5 billion last quarter was also 50% higher than IBM’s “more than $1 billion” figure. Accenture's later reporting date likely benefited the firm due to AI growth.

Still, Accenture clearly had a stronger quarter than IBM in Gen-AI. So why is the company’s stock not getting much love from the market?

ACN: Macro and Internal Issues Cast Cloud Over AI Wins

Unfortunately, Accenture's impressive Gen-AI story is being overshadowed by many other parts of its business. Accenture is a massive company, and other business lines are not performing well. 

The company’s overall bookings, a signal of future revenue, declined by 6% last quarter. 

The company stated that "a significantly elevated level of uncertainty" in the economy this year is impacting its customers. As a consulting firm, many of the services the firm provides are discretionary. In periods of uncertainty, discretionary spending is the first thing to be negatively affected.

Accenture’s federal government business is also slowing, and the company sees this as a 2% headwind to overall revenue growth next quarter. However, the company also noted that it is prioritizing “reinvention” through Gen AI. This is helping the company’s Gen-AI business, but it could also cannibalize clients and other revenue streams.

Still, in the long run, this is likely a positive development for Accenture as it looks to be a leader in AI consulting.

Additionally, the company is dealing with the loss of key leadership figures and a long-term internal restructuring of its services segment. These worries cloud the company’s future, making it difficult for investors to reward the firm for its AI accomplishments.

The firm’s Gen AI bookings still comprise less than 8%. So, they don’t move the overall needle in a big way yet. Overall, the company is dealing with some significant near-to-mid-term challenges.

However, Gen AI is vital to the firm’s long-term success. The fact that it is winning on this front positions the stock nicely over the coming years.

Wall Street Sees Significantly More Upside in Accenture, But Patience Is Paramount

The MarketBeat-tracked consensus price target on IBM is around $254, implying over 13% downside from the stock’s June 30 closing price. However, its two most recently updated price targets are $325 and $320, signaling around 10% upside. The MarketBeat-tracked consensus price target for Accenture is $370, implying nearly 24% upside.

Although many on Wall Street see downside in IBM and upside in Accenture, that doesn’t make the two mutually exclusive. Investors could view IBM as the proven performer and momentum play when it comes to capitalizing on AI services and consulting.

Meanwhile, Accenture is a longer-duration and cheaper play. Accenture’s approximately 22x forward price to earnings (P/E) ratio is solidly less expensive than the 26x figure IBM trades at.

This difference likely incorporates the headwinds Accenture is currently facing. 

However, Accenture has a significant opportunity to see its Gen-AI progress rewarded going forward after these other issues subside. Still, that could take a long time.