TechnologyOne Ltd (ASX: TNE) shares have continued their dominant run in November and are now up more than 96% this year-to-date.
The enterprise software provider continues to deliver solid financial results underneath these price gains.
Consequently, more than a handful of analysts and fundies are bullish on the company's outlook. Here are the reasons TechnologyOne shares can continue their ascent up Mount ASX.
TechnologyOne shares rally in 2024
One might wonder what's behind the upside shown on the chart for TechnologyOne shares this year. We know that stock prices typically follow earnings in the long run. However, TehnologyOne's recent earnings growth might underpin price gains in the short term (this year), too.
The company reported an 18% increase in pre-tax profits in its FY24 numbers, exceeding market expectations and sending TechnologyOne shares higher.
This stemmed from a 20% surge in annual recurring revenue (ARR), a competitive advantage of its Software-as-a-Service (SaaS) model, which generates predictable and recurring cash flows.
Goldman Sachs is bullish on the stock and rates it a buy with a $32.69 price target. Exemplifying Goldman's conviction, this is 47% higher than its previous price target on the business.
UBS also lifted its price target to $33.80 and says the stock is a buy after its FY24 results. The broker cited revenue growth and the firm's profit margins as key reasons for its thesis.
It also predicts TechnologyOne can grow its pre-tax profit by 20% annually over the next five years.
If this translates to similar growth in earnings and valuation ratios remain stable, the stock could appreciate by a similar amount. Only time will tell.
On the flip side, Barrenjoey has issued a sell recommendation on TechnologyOne shares, setting a price target of $25.20. Whilst not a reason the stock can climb further, it is food for thought.
Fundies like the customer base
TechnologyOne operates in more defensive sectors of the economy, such as education and government.
These industries are less sensitive to economic fluctuations, providing the company with a stable revenue stream even during market volatility.
According to the team at Pengana Capital, TechnologyOne has delivered 10% to 15% annual earnings growth for over two decades thanks to this resilient client base.
According to The Australian Financial Review, the fund manager is a long-term owner of the stock, aligning with its policy of "taking advantage of mispricing in the market" and "waiting patiently."
Pengana's portfolio managers highlight that the company's SaaS offering is sticky. Customers rarely switch providers due to the complexity of enterprise software integrations.
This loyalty has helped TechnologyOne maintain long-term contracts and expand its ARR. Management is now targeting $1 billion in ARR by FY30, which could positively impact TechnologyOne shares
Foolish takeout
The market appears divided on whether TechnologyOne shares can keep climbing from here. Still, there's plenty of support to suggest it might.
Experts believe the stock can trade higher based on the combination of business growth, a sound market position, and earnings that are uncorrelated to the business cycle.
Time will tell what happens from here.
