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Kinaxis (TSX:KXS) Stock: Next Stop $50 or $150?

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In my most recent article about Kinaxis (TSX:KXS), one of Canada’s tech darlings — otherwise known as the DOCKS — I wondered if its stock had hit the wall.

AGF Management Limited portfolio manager Peter Imhof suggested Kinaxis stock was overvalued at 70 times its forward earnings, despite the fact software-as-a-service [SaaS] stocks are booming in both the U.S. and Canada,” I wrote July 14.

I argued that although its stock is expensive, it’s got a client roster that screams quality. That’s hard to put a price on.

At the time, it was up 16% year to date. In the seven weeks since, it’s tacked on another 9%. If it keeps up this pace, Kinaxis will deliver its fourth consecutive 20%-plus gain since going public.

It’s impressive.

I ultimately concluded that it had hit a bit of a wall. However, because of its growth, I thought the multiple would decline as earnings growth caught up to revenue growth.

Second-quarter delights

Kinaxis released its second-quarter results August 2, and they were solid.

On the top line, revenues grew by 18.5% to US$39.0 million with recurring revenue (the best there is) up 20.3% to US$29.1 million. On the bottom line, its adjusted EBITDA increased 16.7% during the quarter to US$11.2 million — a margin of 28.7% and 50 basis points lower than in the same quarter a year earlier. That’s not a big deal, given the revenues were up by almost 20%.

Fool contributor Brian Paradza did a good job highlighting why a couple of accounting changes should improve the company’s bottom line in the future. Specifically, marketing expenses related to acquiring customers can now be capitalized over the life of a contract (typically six years) instead of being expensed immediately.

That’s excellent news for investors.

$50 or $150?

As Brian stated in his article, Kinaxis’s growth engine is alive and well, and that should continue to push its stock price higher. I would tend to agree. Here’s why.

Kinaxis’s Rapid Response SaaS-based supply-chain management solution currently has 100 customers, including Toyota. It has 2,000 potential customers in the markets it serves presently and another 3,000 if it broadens its horizons. It’s participating in a US$4.4 billion market, yet its annual revenues are projected to be US$154 million in fiscal 2018, just 3.5% of the potential pie.

Further, when you consider that the newer clients it’s securing are generating 65% of its annual subscription revenue growth, there’s a good chance that its projected subscription revenue growth of 23-26% in fiscal 2018 will be even higher in 2019 and beyond.

“As of June 30, 2018, the total backlog of subscription services commitments was $198.7 million, up from $192.6 million in the first quarter,” stated CFO Richard Monkman in its Q2 2018 conference call. “Of the current period amount, $50.3 million will be recognized in the remaining two quarters of 2018; $79.7 million will be recognized in fiscal 2019; and the remaining $68.8 million, fiscal 2020 and thereafter.”

The point is the company has barely scratched the service when it comes to the world of supply-chain management.

With a five-point growth strategy in place that includes penetrating new vertical markets and channels of distribution, the sky is the limit for Kinaxis.

So, unless there’s a serious slowdown in the global economy over the next 12 months, I would think the odds of hitting $150 are much better than hitting $50.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

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