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Technology One Limited (ASX: TNE) shares sink to a two-year low: Time to buy?

It was another disappointing day of trade for the Technology One Limited (ASX: TNE) share price on Tuesday.

The enterprise software company’s shares drifted to a two-year low of $4.18. This means its shares have shed 28% of their value since this time last year.

Why are Technology One’s shares at a two-year low?

Technology One’s shares have come under significant pressure since the release of a weak first-half result last month.

The market was expecting earnings per share of 2.8 cents for the first-half, up 12% on the prior corresponding period. Whereas Technology One only managed a 2.4% increase to 2.55 cents per share. This clearly wasn’t strong enough growth to justify its shares trading at 35x trailing earnings.

But with its shares now changing hands at 30x earnings, it appears the company is still short of buyers at this level.

A strong second-half will no doubt be needed to shift investor sentiment, but brokers aren’t overly convinced one is coming. Analysts on the equities desks of Macquarie Group Ltd (ASX: MQG), UBS, and Morgans all have neutral ratings on Technology One’s shares at present.

Should you invest?

While I believe its Cloud business has performed strongly and has a lot of growth ahead of it, I’ve been underwhelmed with the rest of its business. Until this improves I am concerned it could act as a major drag on its performance.

And with management only forecasting 10% to 15% profit growth for the full-year, I think 30x earnings is still expensive and better value can be found elsewhere.

Aristocrat Leisure Limited (ASX: ALL), for example, is currently priced at 26x estimated full-year earnings and grew its net profit after tax by an impressive 24.4% in the first-half. More of the same is expected in the second half thanks to its fast-growing digital segment.

Because of this, I would suggest that investors keep Technology One on their watchlists for now and wait for its shares to be trading at a level more befitting of its current growth profile.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 Scott Phillips.

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