Better AI Stock: CGI vs Accenture

Accenture doubled its AI revenue in three months and is executing an aggressive growth strategy. However, CGI stock is a cheaper AI growth play.

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The age of generative artificial intelligence (AI) is upon us. Bsinesses are rapidly adopting generative AI to enhance operational efficiencies and expand earnings margins. Seeing a massive growth opportunity, information technology consultancy firms are investing billions expanding their AI capabilities. Active investors could ride the emerging AI growth wave, too.

Accenture (NYSE:ACN) recently recognized US$300 million in generative AI-related revenue. While its Canadian competitor CGI (TSX:GIB.A) disclosed engagements in over 600 AI projects in early November. But which AI growth stock should investors buy to profit from wider adoption of generative AI business processes?

Buy Accenture stock for AI growth

Accenture is a US$220 billion global information technology services consultancy stock that’s aggressively investing in generative AI capabilities, and the numbers are beginning to show. It sold 100 generative AI projects in four months, and doubled its quarterly revenue from generative AI projects from US$100 million by March 2023 to US$200 million by June this year.

Accenture plans to launch a network of generative AI studios across North America – targeting corporate customers. The company is also in a rush to quickly execute a US$3 billion (C$4 billion) AI investment plan announced in June. The plan could double Accenture’s data and AI workforce from 40,000 to 80,000 over three short years, aided by acquisitions. In comparison, CGI’s total headcount is around 90,000.

Accenture has announced or closed nine acquisitions so far in November 2023, most of them being data science, cloud computing consultancies, and basically AI companies. The company isn’t disclosing the transaction terms, nor the target companies’ current revenues from generative AI business lines. Accenture’s next financial report should be very interesting.

Although Accenture has made significant inroads into the AI market and enjoys wide market coverage given its wider global reach, generative AI revenues are still a small drop in Accenture’s vast revenue ocean. The company’s US$200 million generative AI-related revenue comprised 1.3% of total revenues reported for the past quarter.

Clearly, Accenture’s sheer size significantly dilutes the immediate impact of AI revenue growth on its stock’s valuation. If one assigns an arbitrary 10X multiple to Accenture’s AI revenue during the past 12 months, the new revenue source would add US$3 billion (or under 1.4%) to Accenture’s market value.

Why buy CGI stock instead

Dynamite comes in small packages, and CGI could just be the smaller global IT services consultancy firm that gives Accenture a good run for its AI investment capital.

CGI is a $30 billion business consultancy stock that has been deeply involved in several private and government-related AI projects for years now. It has seen rapid growth in client inquiries on how to deploy generative AI in business processes, and CGI is converting generative AI sales at a good pace right now.

The company reported over $175 million in AI-related bookings during the most recent quarter. CGI’s recent AI bookings comprised 5% of quarterly sales, or 4.4% of total bookings for the quarter.

That said, CGI’s AI revenue may not be a pure generative AI sales figure as it could be for Accenture. Regardless, AI could comprise a more significant revenue component at CGI, when compared to Accenture’s 1.3%. The company is reportedly working on 600 AI projects. CGI could be more of an AI stock than Accenture – based on AI revenue contributions.

Not to be left behind, and following Accenture’s US$3 billion plan announced in June, CGI also announced a $1 billion AI investment plan in July to expand its capacity to satisfy the growing institutional demand for AI offerings.

An arbitrary 10x multiple on CGI’s AI revenue could add $1.8 billion to the company’s market value, increasing CGI’s market capitalization by nearly 6% – a much better contribution to shareholder returns than a 1.4% potential gain on Accenture stock.

Better buy: CGI stock or Accenture stock?

It’s still early days to judge which technology consultancy stock between Accenture and CGI could generate better AI-upside for investors. Both companies are aggressively investing to expand their AI offerings and capabilities – though Accenture has a much deeper pocket to shop for generative AI talent with, and a wider global reach to hoard customers from.

Both companies have similar operating earnings margins of 14.8%, and financial analysts project almost similar revenue and earnings growth rates for both firms in 2024. That said, Accenture stock is more expensively priced with a forward price-to-earnings (P/E) multiple of 27, which is far above CGI stock’s forward PE of 17.9. GGI stock offers a cheaper option to play AI upside on IT consultancy stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool recommends Accenture Plc and CGI. The Motley Fool has a disclosure policy.

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