Accenture Forecast Sends Stock Tumbling a Record 20%

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1:53Scarlet Fu:on YouTube. I'm going to say a year, maybe two years ago, some tech analysts came in here and said, you know, all these companies across industries are spending a lot on AI. It's got to come from someplace, that money. And he highlighted one area that it's going to be hitting, which is some of these consultants out there. Let's pull back on some of the money we're spending on consulting because we have to invest in AI. So it's not so much that they don't need their services, it's that we're investing in AI so we can hold off on paying these guys. Yes, absolutely. And I think in that analyst was Anurag Rana, senior tech analyst for Bloomberg Intelligence.

2:25Anurag, we saw Accenture today give some guidance that really disappointed the street. The stock is down 15 percent year to date. It's down 50, 5, 0 percent on a year to date basis down 15 percent today. What did you hear from Accenture? I mean, to be honest, look at the carnage and what they said was, you know, maybe 100, 150 basis points, less growth for them. I mean, this is really shocking because they talked about Iran. They talked about projects being pushed out into next year and so forth. And this goes into the thesis that you just repeated, because at the end of the day, if you're going to spend money, if an enterprise or a corporation is going to spend money on AI, where is that money going to come from?

3:06You don't have budgets that are going to go up 50%, 100%. You're going to take it out from the software bucket. You're going to take it out from consulting bucket. You may not upgrade your PC. I mean, it has to come from somewhere, and that's what we are seeing right now.

3:19Scarlet Fu:It has to come from somewhere. And if it's coming from software, it's coming from consulting. Does that mean that the companies realize that they can get by just fine without these consultants and they'll never need to go back to them? Or do the consultants become something that they just go to as needed on an emergency basis? So, again, over the last 25 years, we have seen this movie many times. it leads to a year or so of anemic spending and then it bounces back very strongly. The reason it bounces back is because you cannot put those projects on hold forever. You need your data cleaned up, you need your software systems upgraded, all of those things.

3:56The thing that I was surprised by in the Accenture earnings today is their headcount still went up. I mean, if there was massive AI disruption going on in that company, why would these guys hire any more people? A company like Accenture has over 700 ,000 people. Their attrition rate is about 14%, which means all they have to do is not hire, and their headcount goes from 700 ,000 plus to, let's say, 600 ,000, which is what you would expect when somebody is being disrupted by AI. This is a classic case of traditional spending not being strong and these guys getting punished on it. You mentioned software is another area that's under pressure.

4:34And again, you know, you look at Salesforce, some of these names that are down 40, 50 percent. How's the thinking on Wall Street kind of evolving here, Anurag, about software broadly defined as it relates in an AI world? The thinking is very simple right now. Trading is led by short-term focused, you know, you could say investors or speculators. And the trade is very simple. They understand 100 % go long semis and get out of anything that is software or services related. We already heard yesterday from even Apple that memory prices are up, and so Micron is up again on that stuff. So it's a very easy trade for people to see.

5:16They can't see by what's going to happen in three years to software companies or consulting companies. Why bother being in it when the trade is very simple in front of you? Google is raising capital to invest more in AI. infrastructure. Let's stick with the semi-trade. Let's stick with the AI infrastructure trade.

5:35Scarlet Fu:Anurag, we got news this week that Medallia, which is a private equity-backed software firm, is being taken over by creditors led by Blackstone. Tomah Bravo, its sponsor, said it wasn't going to inject fresh cash into the company. Does this spill over in any way to the public market? So this has been a story for, I would say, not just right now, but for decades. When software companies lose their market share or are smaller, they actually go to private equity, they raise debt, and that's how they exist. Our argument is companies with leading market share, companies like ServiceNow, companies like WorkTape, companies like SAP, they're still growing and they have a commanding market share in that area.

6:20Somebody like a Medallia are honestly a blip when it comes to the market share of the entire software landscape. So it's not surprising those companies that are private, they are not growing, they're, you know, a lot of debt. You will see a lot more issues on that spectrum. For our side, when we look at the larger companies, I think this risk is insulated from them.

6:41Scarlet Fu:Understood that, you know, the big software companies are a class unto themselves. But if we're not seeing these software companies see their valuations adjusted, meaning their owners are not marking down the value of these companies, When they eventually do, does that have any unintended consequences on the publicly traded part of the software industry, even if it's not the big names, maybe some of the mid-cap ones? Yeah, they will all be getting butchered. I mean, you can even see today they're getting clobbered because of Accenture. Because the whole risk is anytime you have a company at this point that is not semi-related or hardware-related and has to do with human capital, People just say, you know, find an easy way to say, you know what, they are going to get disrupted.

7:25This is not a business I want to be in. I would rather stick around to something that's tied up with chips or servers.

7:33Scarlet Fu:I remember when not so long ago everyone wanted to be in software. You didn't want to be in hardware. Hardware was a commodity business, right? No chip companies, no big mainframe computers or anything like that. Let's go into software, recurring revenue. Yep, exactly. Recurring revenue. That was definitely the key. Look at Accenture for that matter. Yeah, exactly. It's about, what, 12%, 13 % free cash flow yield? I've never seen that, at least in the 23 years I've covered Accenture. Let's switch gears real quick. Intel shares soar after Trump says it has struck a deal with Apple for a chip deal.

8:06What's going on there? Yeah, we'll have to find out whether it actually happened or not, because I haven't seen the release from the companies at this point. Now, the question here is, Apple does make its own chip. It goes to TSMC to get them made. And those chips, their custom chips have been a big story of selling their Macs and their phones. Now, if they are getting a little bit of, you could say, backlog issues because TSMC is really busy doing AI chips, they could go to Intel. But the big question, which I don't know the answer for, is can Intel even manufacture the chips for Apple at this point?

8:42because this is not something that you could just, you know, it's not like construction. You can find another vendor. You need to have that technology and those nodes in order to fulfill the demand from some of the leading tech companies like Apple.

8:56Scarlet Fu:Yeah, to Anurag's point, Intel declined to comment. Apple did not comment as well. But, you know, that's to be fair. Now, Intel, of course, has this deal with the White House very quickly here, Anurag, where the U.S. government is the biggest investor. So even if it's not a lot of chips, just a symbolic amount says something to the market, doesn't it? Yeah, but that's the case. But that's also could be just driven by market forces right now. We really are in a crunch that you can't get enough semis and chips out in the market given the infrastructure demand. So they will go anywhere they can find chips at this point.

9:30Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. At Brookfield, you can own wealth that's measured in generations. For 125 years, we've built long-term wealth through expertise, discipline, and a clear vision for the future. Providing investors access to alternative strategies built for what's next. Brookfield. Own what's next. Learn more at brookfield.com. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital. So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need.

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11:43Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. President Trump has inked a deal with Iran, shifting the focus to the Strait of Hormuz and getting that open with. So let's get a sense of what's going on here under the hood. Wayne Sanders, he's a senior defense analyst for Bloomberg Intelligence. He's retired U.S. Army colonel. So we thank him, of course, for his service. Wayne, what do you make of this, I guess, memorandum of understanding?

12:21I think like we're inking a real estate deal here. I'm not sure what's going on. Talk to us about the Strait of Hormuz. Can we can the Western world really reopen the Strait of Hormuz? Yeah, I take it as a pretty good sign, actually. I think one of the biggest pieces, the fact that the Iranian president is involved in this and we have not seen any backlash yet from IRGC or anyone else, meaning that the four headed hydra from Iran that you have to get all in place at the same time to be able to move forward with an agreement. We're actually seeing some of that movement. So now as you start to see some movement in the Straits and you're actually I think at this point in time, it also allows for the military as they start moving back from some of the blockade positioning that they're in.

13:03They can move into his own defense while still being able to very quickly move maneuver back if they had to.

13:11Scarlet Fu:Wayne, where does Israel fit into all of this? Israel Israel right now, I see the next 60 days is being obviously very critical. Israel is going to pressure the U.S. as hard as they possibly can, especially when it comes to the nuclear enrichment program. President Trump originally said no escalation in enrichment. And he backed off a little bit about that in the MOA where he's now talking about low-grade enrichment. So think 3 to 20 percent, which is normally used in that civilian power projection, power production perspective. And you need 90 percent high-grade enriched uranium for nuclear weapons.

13:47So there's a very large gap. However, at this point in time, Israel doesn't look at it that way. Israel looks at any type of enrichment is going to be used towards a military-grade program and therefore shouldn't even be started. So I guess over the next 60 days, Wayne, the U.S. and Iran will try to agree on restrictions on Tehran's nuclear program. What should expectations be here? It's going to be rough, honestly. I don't know whether or not they can even do this in 60 days. I think that you may end up seeing an extension beyond that 60 day agreement if going towards that because they are so hard line on both sides.

14:26I know Iran needs to be able to come back with a win and say no, we still have a nuclear program even if it is that three to 20%. However, the Gulf states as well as Israel is looking at this saying do we want Iran to have any type of nuclear capability even if it is at the low end.

14:43Scarlet Fu:So if you were in the oil markets, Wayne, what would you be watching for? What do you think you can kind of key off here? I'm definitely not an oil expert, but I would say that I think right now both Iran and the U.S. are looking at right now the replenishment of stocks becomes a very key piece to this. And so both sides have a very large positive upside right now to allowing the strait to open to be able to alleviate some of that pressure. I think the key then over the next 60 days, though, while that starts is can we start reaching some of the agreements that the longer term agreements, ballistic missiles, the nuclear program and easing of sanctions, the other things that are in the in the deal.

15:22Can all those things actually be solidified to the point where both can return to their to their countries and say that we've won.

15:29Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. What if you could have more wins? More support? More sound effects? At LPL Financial, we like the sound of that. Because LPL offers more. Advisors, what if you could have more ways to help your clients? Ready to invest? What if you could find an advisor that really understands you? When it comes to your finances, your business, your future, at LPL, we ask, what if you could? Paid advertisement. Investing involves risk, including potential loss of principal. LPL Financial LLC member FINRA SIPC. Support for the show comes from Public.

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17:35Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. Or watch us live on YouTube. I had a reserve meeting yesterday. That was pretty interesting. It was a doozy. Yeah. Terse statement. Mm hmm. Pretty clear language from Kevin Warsh, the new Fed chair. He's a Gen X Fed chair. So I feel like he went old school. He's bringing it back to what it was before the era of let's hold a news conference after every decision. Let's overly communicate under Ben Bernanke and Janet Yellen and Jay Powell.

18:15Let's talk to somebody who actually follows closely what the Federal Reserve is doing. That would be one Ira Jersey. Ira, What was your takeaway from the meeting yesterday? What did your market tell you? Wow, there were so many takeaways, Paul. I'm not sure that I could do just one. I think from a market perspective, it was clearly that the committee has turned hawkish. And Kevin Warsh, surprisingly to some, had basically let that hawkishness linger out there because he didn't take any of it back during the press conference. So, you know, the market is now priced for a couple of interest rate hikes, but then an interest rate cut, which something is wrong.

18:57And this is in a note we put out this morning on the terminal, which either the market is pricing for some risk of two hikes, which is completely feasible, right? I can lay out a scenario where the Federal Reserve would do that, given the inflation situation and how strong the economy seems to be. But there's no chance, I think, after that that they wind up cutting within a couple of months, right? One of those two things is wrong. And I think ultimately the market has to figure out what it believes. Is it going to be a slow meandering group of hikes? Or is the Fed going to hike and then hold rates at a somewhat higher level for a while?

19:31Scarlet Fu:Ira, one of the things I was super fascinated by was Kevin Warsh saying that he wants to let the market price in new data and react to what's happening in the economy, rather than try to price in what it thinks the Fed will do in the face of new data. I mean, he wants a pure market reaction, but does this pure market reaction then become an input for the Fed? Well, I disagree. I mean, it always has been, right? The Fed has already taken into account what is the market pricing. I think he thinks, and wrongly, and I disagree with him on this, the market has always, right, since I've been in this business since 1994, the market has always tried to anticipate what is the Federal Reserve going to do.

20:11Now, you know, that changed a little bit with the more communication because now instead of the market waiting for a meeting or waiting for, you know, the H41. Look, I remember getting the H.4.1. That's the Fed's balance sheet. I used to get that off a fax machine so we could determine whether or not the Federal Reserve was easy or hawkish, right? Like, you know, so but so but we had to anticipate what the next move was going to be. And that's always what the market is trying to do. The market is trying to discount what those next moves are. Now, it became easier to determine what they were going to do at a meeting because of all the Fed speak.

20:45And you can take a preponderance and a whole mosaic of all that information that you could coalesce into what's the Fed going to do. But you still had people try to anticipate things even before you had all of this communication. So I disagree with that idea altogether. And the Fed always looks at things like inflation break-evens and what the market's pricing for hikes or cuts, for sure. Ira, I'm looking at the two-year Treasury and the 10-year Treasury because Lisa Bromach taught me how to do that. And I see that it's only like 28 basis points between the twos and tens. And that's a lot less than it was three months ago, six months ago.