Technology One Is A Shareholder Hero

An Aussie tech success story that has made shareholders rich

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The ASX might be desperately short of successful tech companies but Technology One (ASX: TNE) is a big exception. For long-time Technology One shareholders the returns have been incredible. Over the past 5 years total shareholder returns have been a whopping 37% per year for a total five-year gain of over 380%. So what is the story behind this shareholder hero, and are the shares still a bargain today?

The Technology One model

Technology One provides deeply integrated enterprise software for a wide range of customers, and with a particular focus on government clients. The beauty of enterprise software is its high switching costs. If a company wants to change its enterprise software platform it will need to retrain thousands of workers, rework a large chunk of its internal processes, and potentially risk destabilising the entire business.

Those switching costs mean that the average customer sticks with Technology One for a very long time. In fact, the company is proud to say that it still retains many clients from when it first launched almost 30 years ago. That staying power means Technology One doesn't need to spend as much on continuously chasing new business, and has pricing power in existing client relationships; both of which add up to high returns on capital. Technology One has posted a return on shareholder's equity of over 30% for several years.

One of Technology One's critical points of differentiation among enterprise software providers is that the company provides an end-to-end solution without use of third party implementation partners or resellers. This gives Technology One full control over its software and allows it to ensure that new customers aren't disappointed by the myriad problems that typically derail new software implementations.

The power of founders

Founder-led companies have a tendency to outperform. It is hard to match the passion and ownership that comes from having started the enterprise from scratch. Technology One is a classic example, with founder CEO Adrian DiMarco still at the helm almost 30 years later. The Technology One model, with its focus on long-term customer satisfaction, is arguably only possible because of DiMarco's leadership.

Where competitors will use third party vendors in order to juice short-term growth, Technology One has instead focused on building a solid foundation for long term gains. That long-term focus shows up in multiple domains.

In product innovation, Technology One currently spends almost 20% of its revenue on reinvesting in research and development. Compare that with an industry average of around 12% and you can see why customers have been willing to stick around. As the company finishes up its current investment in a new cloud product over the next few years it expects R&D spending to fall to a, still high, 15% of sales – providing a nice boost to the bottom line.

In sales, the company begins engaging with potential clients as much as 7 years before they expect them to need new software. That marathon-length lead time enables Technology One to build a strong relationship with key stakeholders and understand precisely what the customer will need, so they are poised and ready when it comes time to switch.

Is the price right?

Technology One has generated incredible returns for long-term shareholders, but the flipside of those returns are that the shares today are a lot less attractive than they once were. My intrinsic valuation estimate suggests that Technology One is trading a little above fair value today.

Motley Fool contributor Matt Joass, CFA has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »