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This lesser known ASX tech stock is shooting out the lights

The Rhipe Ltd (ASX: RHP) share price hasn’t tasted this sweet in years as the stock surged to its highest level since 2012 this morning after management issued a profit upgrade.

The RHP share price surged over 11% to $2.69 at the time of writing when S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and the All Ordinaries (Index:^AORD) (ASX:XAO) indices gained over just over 1% each.

The cloud solutions company increased its operating profit forecast for FY19 to more than $12.5 million compared to the previous guidance given at its half year result for $11.5 million to $12 million.

Software upgrade

What’s more, management believes the growth will extend into FY20 when profit is expected to hit circa $16 million.

“As a result of these strong results, and the potential for further future growth, the Board of rhipe  has decided to continue investing in the business during the 2020  Financial Year(FY20) with an expansion in operating expenses to fund sales growth, marketing and rhipe’s own intellectual property initiatives,” said its chief executive Dominic O’Hanlon in a statement to the ASX.

The profit upgrade is probably driven by its public cloud business. Rhipe issued a trading update last month to announce that it had exceeded half a million Office365 “seats”, with around 100,000 of these seats going to academic clients.

A seat is a license one software subscription and the growth in seats have hit 65% since the start of the financial year (excluding the discounted academic licenses). Around 60% of this growth is from the Australian market while the balance is delivered through its operations across Asia.

Are high premiums justified?

Brokers will be busy upgrading their valuation for the stock follow the announcement and shareholders will be hoping for some big upward revisions given that the stock is trading on a FY20 consensus price-earnings (P/E) multiple of around 36 times based on the current estimate.

While I suspect the P/E premium will fall materially, it’s not unusual for fast growing IT stocks to trade at such levels. You only need to look at tech darlings like the Xero Limited (ASX: XRO) share price and WiseTech Global Ltd (ASX: WTC) share price to see what I mean.

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Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global and Xero. 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.