The ASX small-cap stock Siteminder Ltd (ASX: SDR) currently has a share price of $4.91 and I believe it has huge potential at this valuation.
I believe it could be one of the best-performing S&P/ASX 300 Index (ASX: XKO) shares over the next three to five years because of its revenue potential and how much its profit margins could improve in that time.
The company says that its Siteminder software is the world's leading hotel distribution and revenue platform. It also has Little Hotelier, an all-in-one hotel management software that aims to make the lives of small accommodation providers easier.
It's already a global company, with offices in Sydney, Bangalore, Bangkok, Barcelona, Berlin, Dallas, Galway, London, Manila and Mexico City. Impressively, it generates more than 125 million reservations worth more than A$80 billion of revenue for its hotel customers each year.
Let's get into why I think this ASX tech share has so much potential.
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Revenue potential
The business is targeting 30% organic annual revenue growth in the medium-term, which would be a very pleasing speed to expand at.
Siteminder can win by generating more subscription revenue and transaction revenue.
The company is regularly adding new hotels to its customer base. In the FY25 half-year period, its net customer additions increased to 2,700. As part of the company's strategy of pursuing larger hotel properties, the number of net rooms added increased by more than 50% compared to the first half of FY24.
The ASX small-cap stock has also been working on its smart platform, which helped accelerate annual recurring revenue (ARR) growth to 22% during HY25. 'Channels Plus' recently completed its pilot and progressed to general release at the end of the FY25 first half – the number of participating hotels has more than doubled from the pilot intake. The 'Dynamic Revenue Plus' was launched in Australia and New Zealand, receiving positive feedback from both hoteliers and industry participants – it was due to be launched in March 2025.
Profit margin growth
The business has worked hard to create a setup where it can deliver scale and operational efficiencies, boosting its unit economics and bottom line whilst still investing in growth.
It's much easier for profit margins to grow at a software business than one involved with physical products because of how easily software can be sold and used over the internet.
During HY25, the business reported its underlying gross profit margin increased by 118 basis points (1.18%) to 66.9%. The pace of that improvement suggests to me it could continue rising for the foreseeable future. This margin is benefiting from the operational leverage of the business.
With revenue and the gross profit margin rising, it's only a matter of time for the operating profit (EBITDA), net profit and cash flow margins to reach positive status and continue rising as well. The company expects to be underlying EBITDA and underlying free cash flow positive in FY25. I expect these two profitability measures could significantly increase over the next few years. At the current Siteminder share price, I'm optimistic about what the ASX small-cap stock can achieve.
