Accenture rebounded from the stock market crash to reach an all-time high market capitalization, while IBM struggled to reach its peak values from the 2010s.
Both tech-based service stocks are considered possible buys, but which is better between IBM vs Accenture stock?
One is already expensive, and its revenues back that valuation. As businesses rushed to pivot their business models in the wake of the pandemic, Accenture’s consultants were called in to help. IBM, on the other hand, is pivoting to a hybrid cloud-based model to keep operating costs down while increasing revenues. So, is it a good investment?
IBM Stock: Good Dividend + Upside From Red Hat?
IBM is a long-standing tech company founded in 1911 as International Business Machines. It started with time clocks to help employers track when their workers clock in and out of the worksite. Soon it was producing industrial equipment and finally computers and data.
The company’s inventions include the hard-disk drive, DRAM, the UPC bar code, and the magnetic stripe card.
In 2020, the company’s offerings include cloud computing, artificial intelligence (AI), Internet of Things (IoT), digital workflows, and cybersecurity among other things. Its business model includes revenue from infrastructure-as-a-service (IaaS), software-as-a-service (SaaS), and platform-as-a-service (PaaS) delivery models.
The company’s stock price plummeted to $90.56 at the onset of the coronavirus outbreak. This was from a peak of $158.75, and the company since recovered to circle the $120 price range.
This gives it a market capitalization over $100 billion heading toward the end of the year, with a 13x P/E ratio. It also has an annual dividend yield north of 5.5%.
CEO Arvind Krishna reaffirmed the company’s commitment to hybrid cloud management. It plans to leverage its Red Hat holdings (which it acquired for $34 billion in 2018) to create turnkey platforms for enterprise that competes with offerings from competitors like Microsoft (MSFT) and Amazon (AMZN).
By implementing IBM technology, it ensures companies will rely on IBM technicians and consultants. This could take a bite out of Accenture’s market, which the company is unlikely to accept without a battle.
Over Half Accenture Revenues From Tech Services
Accenture is a major business consulting service, but it was technology services where it received the biggest revenue boost in 2020. It generated 55 percent of its revenue from this stream, while strategy and consulting services contributed 32 percent and the rest came from business process optimizations.
Like IBM, Accenture realizes its future is in the cloud, and it’s focusing on that moving forward. This gave it a major boost since the stock market crash, which extended through most of the year, with a minor lull in October after its earnings report.
The company’s market cap is sitting over $150 billion following the U.S. election, and it has a P/E ratio of 30x, showing it may be full valued.
A discounted cash flow forecast analysis confirm this given that fair value is pinned at $243 per share.
Its stock prices are trading near $250, after dropping to a low of $137.15 during the coronavirus crash. The brief dip was caused by disappointing earnings.
Accenture’s revenue for the fourth fiscal quarter of 2020 dropped 2 percent year-over-year to $10.8 billion. This fell short of analyst expectations and caused the stock price to drop in return. However, this may be a temporary pitstop, as it already recovered and shows strength in several areas.
The consulting giant grew its new business to $30 billion in a turbulent year. This expansion puts it ahead of IBM and shows why its stock grew while IBM stagnated.
It also has a record high free cash flow of $3 billion, giving it $8.4 billion cash on hand to continue growing through acquisitions. Of course, it’s not without risks, so let’s talk about those.
IBM Stock Was In Chronic Decline Mode, But…
IBM had been on a slow, steady decline since 2012, with few breaks for weary investors.
By the end of 2020, its shares are still trading for just under half the company’s all-time high around $210. It’s also growing slower than Accenture in the information technology (IT) space.
Because of its lackluster growth, the company is also spinning much of its IT services into a new company so it can focus its sprawling business into the hybrid cloud space. This won’t happen until late 2021, and that leaves investors vulnerable until then. This spinoff could negatively impact its stock prices by this time next year.
However, the company’s core business focus is at the foundation of the future. This gives bullish investors plenty enough hope to hold onto that the company is poised for long-term growth.
Accenture Investor Risks
Accenture also showed the risk of investment when its stock price dipped following its fourth quarter FY2020 earnings report.
Despite the rise in revenues in a variety of sectors (including healthcare), the company still failed to grow revenue from the prior year.
It experienced either declines or stagnant growth in media, financial services, products, and resources in the aftermath of the pandemic.
This started to pick back up by the fourth quarter, but the company still has a long way to go to prove it can sustain its coronavirus successes into 2021 and beyond.
Accenture Vs IBM Stock: The Bottom Line
Accenture and IBM are big players in the IT and consulting space. Each came from a different background but converged on cloud computing amid the coronavirus pandemic. Businesses from around the world moved to a virtual business model and strengthened virtual tools for employees and customers alike.
While Accenture experiences an all-time high market cap, IBM is struggling to return to its former glory from a decade ago. Each has growth potential and a dividend and should be considered as fits for your portfolio.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.