Shares of Australian software company TechnologyOne Limited (AU:TNE) declined 2.4% on Tuesday after analyst Chris Gawler from Goldman Sachs downgraded its rating on the stock. Gawler lowered his rating to Hold from Buy with a price target of AU$24.05, implying a change of 0.19% in the stock price. Goldman’s Hold rating is based on the limited potential for short-term earnings or valuation improvement, despite a fundamentally enhanced growth outlook.
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TechnologyOne provides SaaS solutions to top corporations, government agencies, and local councils throughout Australia, New Zealand, and the UK.
Goldman Lowers TNE Stock’s Rating to Hold
Gawler highlighted that TNE’s forward P/E ratio has risen from 40x to 56x since its H1 2024 results in May. This reflects that the company is growing steadily as it finishes moving its services from on-site (on-premise) to the cloud. However, the analyst thinks that since TNE’s stock price is now similar to other top ASX tech companies and forecasts exceed the FY24 earnings guidance, the risks and rewards appear balanced. Year-to-date, TNE stock has gained 56%.
On the plus side, Gawler expects the company’s revenue to grow at a mid-teens percentage rate until 2030, reaching AU$1 billion in ARR (annual recurring revenue). Additionally, he expects PBT (profits before tax) to grow by 15-20%, driven by the company’s high-profit margins on new software subscriptions.
However, Gawler cautioned that achieving these growth rates for ARR could be difficult for TNE in its more established markets, where customer spending typically increases by only 5-10%. As the company reaches higher penetration rates in Australia, it will depend more on its success in the UK to maintain long-term growth.
Is TechnologyOne a Good Investment?
According to TipRanks, TNE stock has a Strong Buy consensus rating based on seven Buy and two Hold recommendations. The TechnologyOne share price target is AU$22.56, which is 6.01% below the current trading level.
