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Why I think the Class Ltd share price is a sell

The Class Ltd (ASX: CL1) share price fell by 6.48% yesterday after the business revealed its half-year result to 31 December 2017. Admittedly, I decided yesterday to write this article today before knowing how much the share price would drop, but I still believe it’s worth saying.

Class is a cloud accounting software provider for self-managed super funds (SMSFs). It offers users time-saving tools to do the work much quicker as well as providing reporting in real time.

Yesterday, Class revealed revenue growth of 21%, earnings before interest, tax, depreciation and amortisation growth of 23%, net profit after tax (NPAT) growth of 19% and earnings per share growth of 19%. These are all good numbers and the company should be commended for them.

I also thought the 14,209 new accounts in the half and 127 net new customers were good pieces of news.

However, there were also some things that caused concern for me.

First, AMP Limited (ASX: AMP) has finally announced it will be migrating its SMSFs to in-house software, but no timeframe has been given. This represents 9,500 funds, or just under 5% of annual committed revenue, but it is still a decent chunk of change for Class.

Next, the acquisition cost for new clients has risen significantly. In the prior period it was $112, but in this period it has risen 20% to $135, meaning it takes around seven and half months to earn back the acquisition cost.

The final worry for me is that the average revenue per unit dropped. For Class Super it dropped from $218 to $215 and for Class Portfolio it dropped from $147 to $139. This could be a sign it has to give discounts to win new business.

Foolish takeaway

Class is still a good business and worth holding for long-term holdings, but I feel that it’s not going to provide excellent returns over the next year with AMP leaving and Class struggling to grow the number of portfolios and revenue per unit at the same time.

If the Class share price were to drop significantly it could turn into a buy again, but it’s currently trading at 41x FY17’s earnings, which is expensive considering the EPS only grew by 19%.

It's probably worth looking at these top growth stocks instead of Class.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Class Limited. 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.

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