The Technology One Limited (ASX: TNE) share price has continued its stellar run on Monday and hit a new all-time high of $8.19.
When the software company’s shares hit this level it meant they had risen an impressive 60% over the last 12 months and has now almost doubled since hitting a 52-week low of $4.11 in July.
Why is the Technology One share price on fire?
Investors have been fighting to get hold of the company’s shares since the release of its strong full year result and positive guidance for FY 2019 and beyond.
In FY 2018 Technology One posted a 9% increase in revenue to $299 million and a 15% lift in profit before tax to $66.5 million. A key driver of this growth was its Software-as-a-Service (SaaS) Platform business which grew its annual recurring revenues (ARR) by 41% to $38 million. On the bottom line SaaS profit grew at an even quicker rate of 175% to $7 million.
Pleasingly, Technology One’s management team believes its SaaS Platform business is well-positioned to continue this strong growth over the medium term.
It expects its SaaS Platform ARR to grow 65% to $62.8 million in FY 2019 and then all the way up to $143 million by FY 2022.
Is it too late to buy Technology One shares?
Technology One’s shares are currently changing hands at a lofty 50x trailing earnings. Whilst its medium term growth forecast arguably justifies a premium valuation, I think things are looking a touch stretched at this level.
In light of this, I would suggest investors keep their powder dry for now and wait to see if a potential profit-taking pullback creates a better entry point which offers a more compelling risk/reward.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium and Appen Ltd. 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.