TechnologyOne (ASX:TNE) is a great company, but is it overvalued?

TechnologyOne (ASX:TNE) is one of those solid growth companies that we wouldn’t recommend investors to buy. It has been a long-term success story since it listed and no doubt has more to come. But we believe it’s growth is not enough to justify its current share price, especially considering there are other opportunities in this space.

Who is TechnologyOne?

TechnologyOne is a tech stock specialising in Enterprise resource planning (ERP) software with a focus on the education and government. This company has over 800 large scale enterprise organisations, with millions of users, as clients. Beyond the dozens of councils it has helped, other clients include Queensland Rugby League, the Te Papa Museum in New Zealand and several universities. Its products perform several tasks for customers including reducing costs, improving efficiency and streamlining processes.

TechnologyOne was founded in 1987 and listed in 1999 at just $1 per share. Investors who have held TechnologyOne for the long term have made some hefty gains from this company. Even investors who have only been in for the short-term have done better than most other tech companies during this time.

A very well performing Tech stock

Why has the company done well? Most obviously it has grown its revenues and profit – for nearly fifteen years. But it is also because its key clients are transitioning towards software solutions such as those offered by the company, a trend occurring before the pandemic, accelerated by the pandemic and still ongoing. Goldman Sachs estimated in 2022 that the transition from on-premise systems to Cloud software is just 20% completed.

Did we forget to mention that TechnologyOne is profitable? This can’t be said of all tech stocks. But more impressively, it has remained profitable while transitioning its offerings to cloud software.

Solid growth

In the last five years, its revenue has transitioned from one-off license fees to recurring SaaS fees. It recorded $470.2m in ARR (up 20%) and $515.4m in total revenue (up 17%). The company recorded an $118m profit, representing 15% growth from the year before and an >25% profit margin.

TNE closed FY24, the 12 months to September 30, 2024, with $278.7m in net cash and paid a dividend of 22.45c per share. The payout was 62% of its profit and represents 15% CAGR growth in the last 5 years. The company’s churn is just 1.3% and its Average ARR per customer was over $300,000.

TechnologyOne has claimed that no other ERP company in the world transitioned without impacting its customers and/or its profit growth. In the last 12 months, it bought CourseLoop which has curriculum management software. Management now claims its OneEducation solution is the world’s first SaaS platform to encompass the entire student lifecycle – from course design to graduation – into a single unified ERP solution.

Future growth prospects

TechnologyOne is not satisfied with this growth. We mentioned it is targeting expansion into the UK, a market 3x larger than Australia. Even in Australia, there is more opportunity to be gained. As we noted above, Goldman Sachs estimates the transition is only ~20% complete. It also estimated that annual revenues are US$235bn compared to enterprise IT revenues of US$1.4tn and the Cloud could easily grab that and even more from non-digital spending.

Turning to consensus estimates, there are 17 analysts covering the company. For FY25, they call for $583m revenue and a $137.5m profit. In FY26, $667m revenue and a $167m profit, followed by $762.2m revenue and a $199.6m profit in FY27. Although TNE has not given its own guidance, it has a target of $1bn ARR by FY30.

TNE has become very pricey!

However, the company is trading at P/E multiples of 70.8x and 59.1x for the next 2 years. Its EV/EBITDA multiples are 37.7x and 32.2x, and PEG multiples of 3.9x and 3.3x. Bear in mind that PEG multiples >1 are considered overvalued.

Better opportunities elsewhere

We like the TechnologyOne thematic, but think there are better opportunities in the sector that are more reasonably priced such as ReadyTech (ASX:RDY) and Objective Corporation (ASX:OCL). Investors should consider these companies ahead of TechnologyOne, in our view.

Yes, TNE is cheaper than Xero (which is 120x P/E for FY25) but it does not quite have the growth opportunity as Xero does, with TNE being a more specialised software provider.

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