The Class Ltd (ASX: CL1) share price was above $4 six months ago, dropped to $2.57 in February and has since recovered to $2.85, where will it go next?
Class is a software provider helping self-managed superannuation fund (SMSF) administrators process accounting on a cloud-based program. It has a market capitalisation of $335 million and I think it can grow strongly from here because of the following reasons:
Large shift to cloud accounting
There is a substantial change of self-managed super funds being moved onto a cloud-based accounting system by accountants because of the efficiency that it provides.
It's a huge boost to Class because it's stealing market share from non-cloud competitors, which is why Class had a 21.7% share of the market at 31st December 2016. Once Class has won the client, it tends to hold on as shown by its 99% retention rate over the last few years.
In its December 2016 quarterly update Class revealed that its number of portfolios rose by 4.6% to 130,216. This is impressive for just one quarter of growth.
Aligned to the growth in numbers of SMSFs
The number of SMSFs in Australia has been steadily growing over the years due to the increased freedom it gives investors.
There were around 589,000 SMSFs in Australia by the end of December 2016 and Class is likely to win a good percentage of new SMSFs that are created.
Valuation
Class' share price has declined by 31% since its all-time high six months ago. The current share price offers investors a reasonable margin of safety with a lot of growth expected over the next few years.
It has started franking its dividend, which means it has a grossed-up trailing dividend yield of 2%.
Risks
The main risk to Class is if rivals produce a competitive product that could potentially lure current or potential clients away. At the moment this isn't the case as shown by Class' retention rate and the amount of new clients it's winning each quarter.
Foolish takeaway
Class is one of the best tech growth stocks in my opinion and is well worth buying for its long-term growth potential. It could grow its dividend strongly from here, turning it into a great dividend stock. However, if you want a great dividend stock now, you should check out our number one dividend stock for 2017.
