'You could make a decent amount of money' from this ASX 200 tech stock

This stock could be an underrated play.

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A leading analyst from a broker has picked out S&P/ASX 200 Index (ASX: XJO) tech stock Iress Ltd (ASX: IRE) as an opportunity to buy that could do well.

The Iress share price has dropped back in the last few weeks after an initial 12.5% rise when there was speculation the business could be a takeover target by Thoma Bravo.

UBS' Sujit Dey thinks Iress stock is an attractive opportunity amid this possible interest.

Iress is a financial software business that helps clients such as challenger banks, insurers, investment managers, traders, brokers, businesses and individuals. It has operations in Asia Pacific, the UK, Europe, North America and Africa.

Why is the ASX 200 tech stock an opportunity?

Dey suggested to the Australian Financial Review that history shows Iress is "slow with its disclosures" and buyers don't have much to lose at this price if a takeover doesn't happen. Dey said:

I really like the set-up of this trade. If no deal occurs, the price doesn't seem to have anything in it anyway. But if a deal comes through, you could make a decent amount of money. Market leading tech is a hot sector for M&A and Iress is in this sweet spot.

…Like 3 years ago, the AFR was first to break the story and the AFR is generally pretty accurate. Iress also dismissed it this time around but if you look back at 2021, it took 6 weeks before Iress disclosed that it had eventually been approached. Therefore, maybe Iress has already been approached and it won't make an announcement until something firms up? This is the approach it took in 2021.

What else?

The business is working hard on a transformation that it hopes will improve its performance.

It may already be seeing the positive effects – it recently reported that there was a 16% improvement in underlying earnings in the second half of 2023 compared to the first half.

The company says it's strongly positioned for growth, with the 2024 guidance upgraded.

In 2024, the ASX 200 tech stock is guiding it can achieve underlying EBITDA of between $137 million to $147 million, which would represent growth of between 6.8% to 14.6% compared to 2023.

By the end of the transformation program, it's expecting to exit 2024 with an underlying EBITDA annualised run rate of between $160 million to $180 million, which would be growth of between 24.7% to 40.3% compared to 2023's figure.

The company is also working on improving its balance sheet by reducing the leverage on its balance sheet through the sale of non-core assets and retaining free cash flow generated. Iress is also increasing the revenue it invests in research and development in its core businesses, which aims to create innovative products.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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