This Tech Company Has Exposed a Dangerous Trend
Vladimir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oracle was just the first company to release disappointing results during the previous quarter. Here comes another company with the same fate. Start of a new trend? Let's find out.
Consulting and outsourcing firm Accenture (NYSE: ACN) recently reported its quarterly results. The company beat analysts’ estimates, but missed on revenue and lowered its guidance. The market punished the stock, which fell 10% after the report. The company’s report put pressure on SAP (NYSE: SAP) and International Business Machines (NYSE: IBM). What was so bad about it?
The phantom of Europe
Accenture relies on two sources of income -- outsourcing and consulting. While outsourcing growth was 7%, consulting growth was flat. That resulted in total revenue slightly below the company’s previous guidance.
The most disappointing fact was the guidance. Accenture stated that the macro environment continued to be challenging and volatile. Clients held back on spending more than what it had previously expected, especially in Europe and Brazil. The most notable decrease happened in ERP, and it was most severe in European countries. Clients have been slowing down their investments in add-on work to existing solutions. Accenture added that fewer large programs were starting right now. New bookings were $8.3 billion in comparison with $ 9.3 billion in the previous quarter.
SAP’s investors must be worried about these results. SAP is the leading ERP provider, and Europe has always been SAP’s stronghold. A lot of tech companies counted on improvements in Europe in the second half of the year, but these hopes do not seem to materialize. SAP’s stock, which had see-saw movement in the first part of this year, has started to decline and is down 9% year-to-date. ERP accounts for almost 30% of SAP’s revenue, so every movement in this field is important for the company’s future. Earnings estimates for SAP have been revised downward by 3.5% during the last 90 days, reflecting the worldwide weakness in IT spending.
IBM has less exposure to consulting, but investors are worried too. Big tech companies like Accenture and Oracle have recently missed on revenue, which places a question on the current state of the market. The fact that IBM is less exposed to consulting does not mean it could be neglected. Business services account for 17.3% of IBM's revenue.
The tech behemoth has struggled to grow this year. IBM’s stock is flat year-to-date. IBM is exposed both to hardware and software. Hardware has been soft all year, and now, software and related services are in question. No wonder why the stock, which trades at a reasonable 10.65 forward P/E and yields 1.95%, is struggling to go in the upward direction. Considering the current state of affairs, it's difficult to predict where the growth would come from, as IT-related spending is cut all over the world.
Is it a buying point?
As you can see, Accenture is not the only tech stock that is struggling to provide meaningful growth this year. Earnings estimates for current year have recently declined by 2%, reflecting softer guidance. The drop in the stock priced has lowered Accenture’s forward P/E to 16, but this sole fact could not be enough to drive more investors in.
The biggest problem Accenture faces is that IT spending is put on hold all over the world. It is not something one company can fix. While North America is the bright spot for the business, other regions tend to underperform.
On the positive side, the company has generated $1.4 billion in free cash flow in the recent quarter. It has ended the quarter with $5.9 billion of cash on its balance sheet. Accenture continues to repurchase its stock and pays a dividend that yields 2.18%.
I see nothing wrong with Accenture’s business, but the environment is a source of worry. As we head into the earnings season, tech companies can start to cut their guidance, which would additionally hurt the stocks all across the industry. There is a risk that the stock would simply stall at current levels, waiting for the next catalyst to come.
SAP, which has big exposure to Europe, is at greater risk. You can expect further short-term downside in this stock. IBM’s first quarter miss resulted in a one-day loss of 7.5%, so I would recommend to sit on the sidelines and wait for the report.
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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Accenture. The Motley Fool owns shares of International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!