Ottawa-based supply chain management software provider Kinaxis (TSX:KXS) offered long-term investors an excellent opportunity just a month ago. The stock was trading at $61 in December, a 52-week low. Since then, the price has surged more than 23.5%.
The stock has had a phenomenal run ever since its initial public offering (IPO) in 2014. Over the past five years, the company has delivered a total shareholder return of over 440%. Currently trading at 120 times annual earnings, it seems the market is confident about a similar rate of growth in the near future.
Like any other enterprise software provider, Kinaxis’ growth story is based on a familiar framework. The company reaches out to corporations to sign long-term deals for access to its unique software. Depending on how unique and valuable the software is, these deals could be rather lucrative.
Cash from these lucrative deals can be used to reinforce the company’s competitive edge through research, development, or acquisitions. Software companies like Kinaxis dominate their niche with irreplaceable software and an ecosystem that ties enterprises in. Usually, the return on equity is a clear reflection of the strength of this model. Kinaxis has ROE of 11.5% and negligible debt.
The company generated $34 million operating cash flow over the past 12 months, adding to its cash hoard of over $176 million. This cash can be reinvested in more software, acquisitions, or to pay shareholders in the form of dividends.
However, Kinaxis doesn’t pay a dividend, so that factor is already ruled out. In its most recent quarter, the company managed to expand total revenue by 18%, subscription services revenue by 19%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 14%. However, net profit declined by 14%.
With quarterly earnings per share at $0.13, the company missed Thomson Reuters’s estimate of $0.27 by a significant margin. The management team said late-stage deals slipped outside of the quarter, which suppressed the reported subscription growth figure.
Coupled with the fact that Kinaxis management lowered their annual guidance in the quarter right before this and the broad sell-off in technology companies throughout the last few weeks of 2018, you can see why KXS was down to its 52-week low.
However, investors are once again optimistic about the company’s prospects. The team is working on securing a deal with Toyota Motor Corp., among other large enterprises. They also formed an alliance with consulting giant Ernst & Young LLP. to modernize supply chain capabilities for common clients.
Meanwhile, much of the company’s capital expenses are focused on artificial intelligence (AI) research and development. These investments could lead to AI-powered predictive capabilities being built into the company’s supply chain software solutions, which could widen their competitive edge over time.
With some major deals in the pipeline and ongoing efforts to bolster the core software solutions with innovative AI, Kinaxis is on the verge of its next growth spurt this year.
Bottom line
Kinaxis may seem overvalued at the moment, but if it can snap up a few big contracts this year and have a breakthrough on its AI efforts, long-term investors could be in for a windfall.
Fool contributor Vishesh Raisinghani has no position in the companies mentioned. Kinaxis is a recommendation of Stock Advisor Canada.
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