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Why I think TechnologyOne (ASX:TNE) could be in the buy zone

Investors rotating out of tech into more value-focused sectors such as energy has caused a fairly significant sell-off in some of our larger ASX tech names.

Enterprise software company TechnologyOne Ltd (ASX: TNE) hasn’t been spared during this time, with the share price on a gradual downwards trend since hitting its six-month high of $9.56 in November.

TNE share price chart

Source: Rask Media 1-year TNE share price chart

At the time of writing, TechnologyOne shares are trading at an 18% discount to where they were a couple of months ago. Here’s why I think this might be a buying opportunity.

About TechnologyOne

TechnologyOne develops, sells, and implements mission-critical enterprise software on a global scale. Some of its markets include local and federal government, health and community services, and corporates and financial services.

The company offers 14 different licensable products which aim to simplify the user experience and drive underlying efficiencies.

Recent TNE share price movements

As mentioned earlier, many of the tech giants on the ASX have taken a beating recently. Appen Ltd (ASX: APX) and Altium Limited (ASX: ALU) are good examples, but both of these companies have had some challenges arising from COVID-19.

TechnologyOne’s valuation has also been dragged down, but its latest full-year results released in November tells quite a positive story compared to some of these other ASX tech shares.

Why I like TechnologyOne

TechnologyOne has many characteristics of a high-quality business that I would look for in an investment.

It’s extremely well managed and has an excellent track record of growing the business over time. Revenue has grown consistently year-on-year and earnings per share has also grown at a compound annual growth rate (CAGR) of 14% over the last 10 years.

The company has no debt on its balance sheet and usually expenses all maintenance and research on its income statement. Around 22% of annual revenue was spent on research and development costs in FY20.

Due to how mission-critical TechnologyOne’s suite of products are, its customers are so sticky to the point that the company can boast an enviable customer retention rate of 99%.

Over 85% of the company’s revenue is now recurring and it plans to grow this number by continuing to migrate its customer base from an on-premise model to a more flexible software-as-a-service (SaaS) model.

Summary

I think it’s worth taking a look back in time to realise how well this company has performed over the last 10 or so years.

Given its UK expansion opportunity and its ambitious goal to double the size of the company every five years, I think TechnologyOne may be one to consider adding to your portfolio.

For more reading on TechnologyOne, check out this article: Why I like TechnologyOne shares.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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