Why the Rally in Absolute Software (TSX:ABT) Stock Isn’t Over Yet

Absolute Software stock has outperformed the broader markets, and there is still ample room for growth.

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Shares of Absolute Software (TSX:ABT) have generated exceptional returns. Absolute Software stock has surged about 49% so far this year, outperforming the broader markets by a wide margin. Moreover, it is has grown more than 59% in one year. 

Despite the phenomenal rise in the value, there is still plenty of room for growth for Absolute Software stock. 

ACV base growth to drive Absolute Software stock

Absolute Software stock continues to benefit from consistent growth in its ACV (Annual Contract Value) base. The company’s software provides management and security of computing devices, the demand for which continues to rise.

Investors should note that Absolute Software has more than 12,000 customers, and some of them are the world’s largest banks and Fortune 500 companies.

Absolute Software’s ACV base is a leading indicator of its future revenue streams. Growth in ACV base indicates that the company’s annual recurring revenues are likely to rise. Absolute Software’s ACV base has grown at a healthy rate over the past several quarters, thanks to the growth in its Enterprise and Government verticals, which represents about 70% of its ACV base.

In the most recent quarter, Absolute Software’s ACV base increased by 7% year over year. Meanwhile, it increased by 1% sequentially. 

Absolute Software’s net ACV retention rate, which indicates its ability to retain and grow the ACV of its existing customers, stood at 100% in the most recent quarter. The high net ACV retention rate is an encouraging sign. 

The company is directing its investments in the Enterprise and Government verticals as both these segments are experiencing solid growth and will continue to drive ACV base in the future.

Meanwhile, Absolute Software announced a partnership with ServiceSource to improve its net ACV retention rate and drive higher ACV from its new customers. 

Strong fundamentals

Investors should note that Absolute Software’s commercial recurring revenues represent about 96% of its total revenues. The company’s high recurring revenues are comforting, indicating predictability and strength of its future income and cash flows.

Meanwhile, growth in ACV from new customers and high retention rate should continue to boost its ACV base, in turn, its revenues in coming quarters.

Absolute Software maintains a strong liquidity position with ample cash to meet its capital requirements. Also, Absolute Software is debt-free and remains well positioned to capitalize on future growth opportunities. 

Despite the stellar growth in its stock, Absolute Software’s valuation is still within reach. Absolute Software stock trades at a 12-month EV-to-sales ratio of 3.4, lower than the industry (IT services and consulting) average of 3.8. Meanwhile, it offers a healthy dividend yield of 2.5%.

Bottom line

The coronavirus pandemic has dramatically changed the way of our working and learning. Hybrid work and education is likely to be the next normal and could increase the demand for the company’s offerings.

Apart from favourable market trends, Absolute Software’s consistent growth in ACV base, lack of competitive activity, and high customer retention rate position it well for future growth.

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 Sneha Nahata has no position in any of the stocks mentioned.

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