Buy this undervalued ASX 200 tech share now: Goldman Sachs

Is this tech share a must buy? Let's find out.

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The TechnologyOne Ltd (ASX: TNE) share price is outperforming on Wednesday.

In afternoon trade, the ASX 200 tech share is up almost 1% to $15.30.

Why is this ASX 200 share outperforming?

Today's gain could be thanks to a bullish broker note out of Goldman Sachs this morning.

Ahead of the company's full-year results release next month, the broker has reiterated its buy rating and $18.30 price target on the company's shares.

This implies a potential upside of approximately 20% for investors over the next 12 months.

What did the broker say?

Goldman is expecting a strong FY 2023 result from TechnologyOne next month. It commented:

We estimate TNE will report (1) SaaS ARR of A$382mn or +39% y/y vs ~40% guidance and +36% VA Consensus; (2) Total revenue of A$426mn or +15% y/y vs A$429mn consensus; (3) Profit before tax of A$131mn or +17% y/y vs +10-15% guidance vs +16% consensus.

But the main focus for the broker will be the company's guidance. It feels that there's a strong chance that management will bring its $500 million ARR target forward by a whole year thanks to its impressive growth.

We could even see the introduction of a new aspirational ARR target. Goldman suspects that this could be a billion-dollar target. It adds:

We believe TNE may formally bring forward its A$500mn ARR target to FY25 (from FY26), in line with our estimates (A$520mn), given the strong growth implied by the ~40% SaaS ARR guidance.

Looking ahead, management may elect to provide its next aspirational ARR goal, supported by the 115% NRR target and improving UK growth prospects, for example A$1bn ARR by early-2030s (GSe) or even as soon as FY30 if we extrapolate ~15% ARR growth forward. In our view this would be ahead of market expectations for high-single / low-double digit ARR growth and serve to highlight TNE's organic growth credentials (a key investor debate with the cloud transition ending FY24).

In light of this positive outlook, the broker believes this ASX 200 tech share is undervalued at current levels. It concludes:

In our view, TNE's current valuation does not account for its above-trend earnings growth outlook, nor the defensiveness of its earnings in a more challenging macro environment. With greater confidence in the medium term revenue/earnings outlook, we see TNE's growth-adjusted multiple discount vs peers as attractive and we believe the shares can outperform. Buy

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group and Technology One. The Motley Fool Australia has recommended Technology One. 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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