Buy this ASX 200 tech stock now before it's too late: Goldman Sachs

The broker sees potential for some big returns from this tech leader.

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Investors that are the lookout for technology exposure might want to consider TechnologyOne Ltd (ASX: TNE).

That's the view of analysts at Goldman Sachs, which see the ASX 200 tech stock as a great option right now.

What is the broker saying about this ASX 200 tech stock?

Ahead of the release of the enterprise software provider's half year result later this month, Goldman is predicting sales growth ahead of consensus estimates. It said:

We estimate TNE will report (1) SaaS ARR [annual recurring revenue] of A$425mn or +35% y/y vs +34% Visible Alpha Consensus Data; (2) Total revenue of A$241mn or +19% y/y vs A$231mn consensus; (3) Profit before tax of A$62mn or +18% y/y vs +19% consensus. We expect TNE to provide its typical +10-15% full-year PBT growth guidance, although based on recent strong ARR growth in combination with a small amount of margin leverage we expect TNE can comfortably exceed the top-end in November (GSe +16%).

Overall, the broker believes the ASX 200 stock is operating ahead of guidance and feels this isn't being reflected in its share price. It adds:

In our view TNE's above-trend ARR and earnings growth outlook, improved earnings visibility and upside levers to management targets (e.g. SaaS+, UK) are not being fully reflected in valuation. Execution on sustainable +115% NRR could help to close TNE's recent underperformance vs tech peers given 1H24 is the first result without a material sequential cloud flip tailwind (ie. substantially all growth will be underlying).

Decent upside predicted

Today's note reveals that Goldman has reiterated its buy rating with a slightly improved price target of $18.10.

Based on its current share price of $16.24, this implies potential upside of 11.5% for investors over the next 12 months. The broker also expects a modest 1.4% dividend yield to sweeten the deal further.

But it may not stop there. In its bull case, Goldman sees scope for the ASX 200 tech stock to rise to $27.40, which is almost 70% higher than current levels. It explains:

We highlight our recent TNE bull case analysis of A$27.4 which factors in low-to-mid teens top line growth in ANZ (still assumes the 115% NRR target is not met), as well as a 30% revenue CAGR in the UK, where we ascribe A$21.3 to the ANZ business and A$6.1 for the UK. On this basis, market pricing (A$16.3) could be (1) implying that ANZ NRR decelerates materially below <115% in coming years and that TNE has little success in new product cross-sell; and (2) placing little value on UK, despite recent local government and higher ed customer wins.

Motley Fool contributor James Mickleboro has positions in Technology One. 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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