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This Tech Stock’s Global Expansion Makes it a Buy

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Are you familiar with Kinaxis Inc. (TSX:KXS)?

The Canadian tech company’s Rapid Response cloud-based supply chain management software solution is rapidly becoming the must-have-product, large-cap company around the world.

I’d first recommended its stock in July 2016 when it was trading around $52. My rationale for owning was two-fold: it had no debt and generated significant recurring revenue. One year later, I’d recommended it again, despite the fact it had gone on a big run and was trading at a nosebleed valuation.

Nine months since my last recommendation, I’m not ready to step off the Kinaxis bandwagon, despite the fact that some analysts are questioning its rate of growth.

“While we believe Kinaxis can return to +20% top-line growth this year, solid Q1/18 gross bookings are necessary to ensure that recurring revenue growth meets our target,” Industrial Alliance Securities analyst Blair Abernathy wrote in a recent note to clients. “At stock price current levels, we are maintaining our Hold rating.”

Kinaxis reports first-quarter results May 2 after the close of trading. Abernathy is looking for indications the company is adding new customers and not just additional revenue from existing ones.

In 2017, Kinaxis increased revenue by 15%. Abernathy would like to see it return to 20% or higher — a level of growth it routinely delivered prior to last year. To do that it needs to generate at least US$160 million on the top line in 2018.

I think it can do it. Here’s why.

Global expansion continues

On April 19, Kinaxis announced that it was opening data centres in Tokyo and Osaka to support its growing customer base in Japan. This news follows the company’s announcement in January that Toyota Motor Corp. had selected Kinaxis to manage its supply chain processes using Rapid Response — a  big win. Kinaxis will host Toyota and other Japanese companies’ supply chain operations from those data centres.

“Our investment in the new Tokyo and Osaka data centre facilities further strengthens our ability to support the scale, complexity, operational reliability and rigorous security requirements of our customer supply chains 24 hours a day, 365 days a year,” said Kinaxis CEO John Sicard April 19.

In 2017, Kinaxis generated US$15.4 million in revenue outside Canada and the U.S. That’s 11.6% of its revenue. In 2016, it was 10.4%.

If Kinaxis stock is to break through $100 on its way to $200, it’s got to get the growth rate moving outside the U.S. Since 2013, U.S. revenues have grown 175% on a cumulative basis. Outside Canada and the U.S., international revenues have grown 74%, a respectable growth rate, but from a much smaller revenue base.

The opening of the Japanese data centres suggests Sicard understands it needs to get international revenues (non-U.S.) over the US$100 million hurdle as it did in the U.S. this past year.

The bottom line on Kinaxis

if supply chain management wasn’t so darn important to businesses these days, I’d say Kinaxis stock is off-the-charts expensive. However, logistics rules the world, and that means Kinaxis has something a lot of companies want.

Yes, it operates in a bit of a niche market, but when you provide a product like Rapid Response that’s good, there will always be room for more growth.

I’d wait for earnings on May 3 just to make sure there aren’t any red flags. Then I’d buy away.

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

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