The ASX stock TechnologyOne Ltd (ASX: TNE) has been heavily sold off recently, but I think investors are being far too pessimistic about its long-term potential.
A share price is meant to reflect the long-term earnings outlook of a business, not just expectations for the next year or two. The TechnologyOne share price has dropped heavily over the last several months, as the chart below shows.
Looking at this sharp decline makes me think the global enterprise resource planning (ERP) software business is an excellent opportunity.
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Increased growth guidance
The business recently announced that it expects to grow faster in FY26 than initially guided.
I can't say for sure how AI will change the software space in the long term, but I think that TechnologyOne is demonstrating it can perform strongly with its operations.
Previous guidance was that profit before tax (PBT) would grow between 13% to 17% in FY26. It's now expecting PBT to rise by between 18% to 20% – the mid-point was hiked by four percentage points from 15% to 19%. That's a significant increase.
It also increased its annual recurring revenue (ARR) growth guidance to between 16% to 18%.
Understandably, there is a clear connection between its (annual recurring) revenue growth and profit growth. TechnologyOne said it's targeting the top end of its guidance range for both PBT and ARR.
TechnologyOne increased its guidance due to confidence in its customer pipeline in Australia, New Zealand, and the UK. It's positive about the momentum of its 'SaaS+' (software as a service) and the response to specific offerings.
The ASX stock has a big focus on clients
I think a key element of the long-term success of a technology business is ensuring that users and clients always get great value for what they're paying. The high operating profit margins will inevitably help the bottom line, but businesses need to do their best to attract and retain revenue, too.
TechnologyOne has a variety of clients, including businesses, government agencies, local councils and universities. The business spends around a quarter of its annual revenue on research and development, helping it deliver high-quality (and continually improving) software to clients.
That R&D spending helps the business achieve a high net revenue retention (NRR) rate. The NRR describes how much of last year's revenue from the existing client base the company retained. TechnologyOne aims for an NRR of 115%, meaning that the existing clients collectively deliver 15% more revenue than in the last year.
The ASX stock can double its revenue every five years if it grows revenue by 15% per year, which is an excellent growth rate.
Much better valuation
Following the hefty decline in the TechnologyOne share price, the price-to-earnings (P/E) ratio has significantly decreased.
The business is forecast by broker UBS to make net profit of $163 million in FY26 and $196 million in FY27. That means it's valued at 50x FY26's estimated earnings and 41x FY27's estimated earnings. I think it's a great time to invest, particularly if net profit can climb all the way to $340 million in FY30, as predicted by UBS.
I think the ASX stock is significantly undervalued.
