ELMO (ASX: ELO) share price has taken a beating, down 35% in 12 months

This former ASX tech darling has had a bad year, falling 35%. Let’s take a look.

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ELMO Software Ltd (ASX: ELO) has been a popular tech stock for investors over the years. But it’s been a different story in the last 12 months with the Elmo share price taking a beating, down 35%.

ELMO is a cloud-based human resources and payroll software company that provides businesses in Australia, New Zealand and the United Kingdom with a unified platform that streamlines a range of everyday processes.

Let’s take a closer look at what might be affecting the ELMO share price.

Why the drop?

We can turn to share price dilution as one possible explanation for the decline. In May 2020, the company announced it was planning to raise $70 million through an institutional placement, and a further $20 million through a share purchase plan offered to existing shareholders.

As typical with capital raising, these shares are usually offered at a discount, putting downward pressure on a company’s share price. This is possibly what happened to the ELMO share price after it dropped from its May high.

In addition, ELMO declared in its FY20 report that it made $50.1 million in revenue. All good, except the expectation for its previous guidance was between $50 million and $52 million.   

Also in May, the Australian Financial Review reported that James Dougherty from Lennox Partners believed that ELMO operated in a very competitive part of the market, and although revenue had been growing organically, cash flow losses were growing steadily every year.

More recent results

ELMO’s first-half FY21 results were more encouraging. Total revenues came in at $30.6 million for the half, an increase of almost 30% over first-half FY20. Annualised recurring revenue was $74.2 million, an uplift of 43%, while earnings before interest, tax, depreciation and amortisation expenses (EBITDA) was close to breakeven at -$0.8 million.

Last month, Elmo announced its FY21 guidance. The company projected its annualised recurring revenue (ARR) to come in at $83 million to $85 million. The market appeared to be disappointed as this result was within the mid-range of the previous $81.5 million to $88.5 million indicated.

Similarly, revenue was set to increase between $68 million to $70 million. Previously, the company had revenue set at $65 million to $71 million for FY21. 

So according to the FY21 update, ELO upgraded revenues by 1% ($65m – $71m upgrade $68m – $70m) and downgraded ARR by 1% ($81m – $88m upgrade $83m – $85m). 

Brokers say heaps of growth left

It seems that brokers like ELMO’s recent acquisitions of complementary businesses Breathe and Webexpenses.

One such broker is Shaw and Partners, which maintained a buy on the stock after attending ELMO’s recent FY21 virtual investor technology day. The day was based around demonstrating ELMO’s recently acquired Webexpenses product. 

The broker’s takeaways from the conference were that Webexpenses has continued to grow in the UK, and despite the recent start, it was already making sales in Australia and New Zealand. The broker was also buoyed by the Breathe hard launch which remains on track for July in ANZ. Shaw and Partners’ price target is $8.85.

Morgan Stanley also stands by the company, in May, it retained its overweight rating and $9.70 price target on its shares.   

Foolish takeaway

The ELMO share price has lost almost 35% over the past year. The company’s shares hit a 52-week high of $7.86 last June. At the time of writing, shares in the company are down 1.24% trading at $4.78.  

The good news is that brokers are still bullish on the stock and, according to their price targets, believe there are great margins to be made on the current ELMO share price.

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Motley Fool contributor Frank Tzimas has no position in the shares mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Elmo Software. The Motley Fool Australia owns shares of and has recommended Elmo Software. 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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