Key points
- The Nitro share price has fallen out of favour with investors but Goldman Sachs thinks it's too cheap to ignore
- The ASX tech shares operate in a US$34bn market that has a positive growth outlook
- The broker initiated coverage on its shares with a 'buy' recommendation and $2.95 price target
The Nitro Software Ltd (ASX: NTO) share price rebounded on Friday after Goldman Sachs listed the company as its latest ASX tech 'buy' idea. This comes after Nitro ended the previous two days in the red.
Shares in the global document productivity software company jumped 1.85% to close at $1.93 apiece.
In contrast, the S&P/ASX 200 Index (ASX: XJO) ended the day up 0.59% at 7,120 points.
Nitro share price falls from grace
The threat of interest rate hikes is weighing on ASX tech shares but Goldman Sachs believes the Nitro share price is cheap.
The broker initiated coverage on the company and pointed out that its total addressable market (TAM) stands at US$34 billion.
"Nitro operates in large, underpenetrated markets supported by structural growth tailwinds including remote work, enterprise digitisation, and e-signing adoption," said the broker.
"We estimate Nitro can increase its TAM penetration from 0.15% to 1.4% by FY40 implying 9x uplift to Nitro's current revenue base."
That assumption may sound too aggressive to some, but Goldman believes it's achievable for three reasons.
First is Nitro's core competitive advantages. Its products are cheaper, easy to use, and come with good customer service.
Further, there is strong underlying market growth. Additionally, the large market leaves plenty of room for Nitro and its competitors to grow sales.
The fact the Nitro share price has fallen so hard shows how much investors are underappreciating its growth potential.
How much is the Nitro share price worth?
Goldman noted the Nitro share price trades at around a 70% discount to its software-as-a-service (SaaS) peers.
The broker's 12-month price target is $2.95 a share. This implies a 53% upside to the current share price.
But investing in Nitro isn't without risks. Competition from larger rivals and other challengers and execution risks are some of the factors investors should be cognisant of.
Other concerns highlighted by Goldman include higher-than-expected investment levels and currency risks.
