TFSA Investors: A Growth Stock Whose Dip I’d Buy With an Extra $5,500

Kinaxis Inc. (TSX:KXS) shares have returned ~455% over the last five years, but they have recently taken a 21% dip from their all-time high, which was reached earlier this year. For those who are unfamiliar with Kinaxis, it’s a provider of cloud-based Sales and Operations Planning (S&OP) and supply chain solutions. If you’re hungry for a high-flying growth play within the tech sector, then it may be time to start accumulating shares of this gem on its recent post-earnings pullback.

Mixed Q2 2017 earnings with downgraded guidance

For the second quarter, Kinaxis clocked in revenue of US$32.9 million, up 14.4% year over year from US$28.73 million, but it missed analyst expectations of US$35.1 million. Subscription revenues were up 21.4% year over year to US$24.2 million, but professional services revenues declined 1.7% on a year-over-year basis to US$8.4 million. The revenue miss can be attributed in part to an issue relating to a fairly large Asian subscriber that breached its contract with Kinaxis. As a result, Kinaxis didn’t record the revenue. The issue appears to be isolated, and investors probably shouldn’t think too much of it.

While Kinaxis missed on revenue, it knocked one out of the ballpark in the earnings department. For the second quarter, the company clocked in an EPS of US$0.30, up 50% year over year, crushing analyst expectations of $0.23. The earnings beat can be attributed to better than expected margins.

I believe the quarter was fairly impressive until the management team revised its full-year guidance to the downside. Management now expects revenues of US$131-133 million, down from the original guidance of US$140-144 million.

While such guidance downgrades may be alarming to investors, I do not believe the magnitude of the post-earnings plunge was warranted, especially considering how fast Kinaxis has been developing its channel.


Shares of KXS currently trade at a hefty 116.35 price-to-earnings multiple, a 13.5 price-to-book multiple, a 12 price-to-sales multiple, and a 45.2 price-to-cash flow multiple. That’s really expensive, but, like with most high-flying tech stocks, it doesn’t really make sense to take a value-oriented approach.

Kinaxis is growing its channel extremely fast and subscription growth is likely to continue to surge in the years ahead. With that being said, I believe Kinaxis deserves its premium valuation, and it appears that the general public overreacted to the underwhelming Q2 2017 results.

The post-earnings sell-off creates an attractive entry point for investors who are looking for explosive long-term growth. If you’ve got the room in your TFSA, now may be the time to load up.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned. Kinaxis is a recommendation of Stock Advisor Canada.

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