I'm always on the lookout for S&P/ASX 200 Index (ASX: XJO) stocks that could make market-beating returns for my portfolio.
Some companies have an impressive ability to keep growing over a long period of time. They are wonderful compounders of wealth, and the market sometimes underestimates how much they can grow over many years.
TechnologyOne Ltd (ASX: TNE) has this potential, in my opinion. This ASX tech share describes itself as Australia's largest enterprise software company and, in fact, one of the country's larger companies. It's a global provider of software as a service (SaaS) enterprise resource planning (ERP) solution. Clients include leading corporations, government agencies, local councils and universities.
I'm a fan of this ASX 200 stock for a few key reasons.
Strong revenue growth
For an ASX 200 stock to deliver long-term market outperformance, it needs to achieve a good revenue growth rate. Revenue is a crucial driver of profit, and profit growth is usually an essential ingredient of share price growth.
TechnologyOne has grown its revenue significantly over the past ten years and expects to continue growing strongly over the next several years.
In its FY24 first-half result, the company reported that its total annual recurring revenue (ARR) reached $423.6 million (up 21% year over year). TechnologyOne recently announced it was targeting $1 billion of ARR by FY30, suggesting it can rise by 136% between the HY24 result and the FY30 result.
The company has a net revenue retention (NRR) target of 115%, meaning that each year, it wants to grow its revenue from its existing client base by 15%. That's a great organic growth rate in my mind and means any client wins are a bonus.
Rising profit margins
With its revenue growing at a solid double-digit rate, I hope that profit can rise by at least the same pace over the long term.
Many of the best businesses on the ASX and globally are able to grow their profit margins, meaning profit can rise even faster than revenue. Considering that investors focus on profit, rising margins could boost shareholder returns.
In the HY24 result, TechnologyOne said:
We will continue to benefit from improving margins because of the significant economies of scale from our single instance Global SaaS ERP solution.
The ASX 200 stock expects its 'continuing profit before tax' margin to grow to at least 35% in the longer term. The company reported that its HY24 PBT margin was 25%.
A focus on shareholder returns and the clients
TechnologyOne generates a good level of revenue and profit each year, and I like how the company looks after two of the most important stakeholders – clients and shareholders.
Without clients, there is no business. The ASX 200 stock invests a significant portion of its revenue into research and development (R&D) each year. This helps it retain and win clients, as well as assisting with increasing revenue from existing clients. In HY24, 24% of its revenue was spent on R&D, with the dollar figure increasing by 15% year over year to $56.9 million.
In terms of looking after shareholders, TechnologyOne has grown its payout every year since 2013.
The HY24 result saw the company hike its annual dividend per share by 10% to 5.08 cents. The dividend yield is low, but I think the growing payout speaks to management's focus on ensuring that shareholders are rewarded for long-term ownership.
While the valuation is not cheap, I think this ASX 200 is on track for more long-term strength, so I'm considering making it the next addition to my portfolio.
