Buy Now: 1 Roaring TSX Tech Stock That’s Still Undervalued

The low valuation and strength in the base business bode well for future growth.

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Absolute Software (TSX:ABT) stock is on a tear and is up about 66% this year. In comparison, the benchmark index is down about 8.4% year to date. Despite the solid run, Absolute Software stock looks undervalued when compared to the industry average. The software company’s stock trades at a next 12-month EV-to-Sales ratio of 3.8, which is well below the industry average of 4.3.

Moreover, Absolute Software stock trades at a forward price-to-cash flow ratio of 21, significantly lower than the industry average of 25.3.

The company’s strong fundamentals and low valuation provide a solid foundation for a massive rally in its stock.

Solid underlying business

As remote work and e-learning are gradually becoming the new normal, the demand for Absolute Software’s products and solutions are on the rise. The tech company offers cloud-based security and management of computing devices, data, and applications.

The pandemic has resulted in the rapid adoption of remote work and distance learnings, thus magnifying the demand for Absolute Software’s offerings.

Investors should note that the company’s ACV base or Annual Contract Value base, which is an indicator of its future recurring revenue streams, continues to grow at a healthy rate. The company’s ACV base increased 7% year over year in the most recent quarter.

Meanwhile, it has grown at a mid- to high-single-digit rate in the last seven consecutive quarters. Also, it has managed to increase its ACV base on a sequential basis in the past four quarters, an encouraging sign.

Absolute Software’s net retention rate from the existing commercial customers stood at 100% as on March 31, which is commendable. The net ACV retention rate indicates the company’s ability to retain and expand the ACV of its existing customers.

The company is focusing on enhancing its renewal efficiency and improve its net ACV retention rate through inside sales and partnerships with third party renewable organizations.

The strong ACV base and high net retention rate boost the company’s recurring revenue streams. Of its total revenues, about 96% comes from the commercial recurring revenues, which is positive.

Zero debt and lack of competition

Absolute Software maintains a strong balance sheet with ample liquidity and zero debt. The debt-free balance sheet and sufficient capital resources position it well to capitalize on inorganic growth opportunities in the future.

Moreover, Absolute Software faces very few direct competitors for its offerings, which is a long-term tailwind and supports its growth.

Bottom line 

Absolute Software serves more than 12,000 customers, including 209 Fortune 500 companies and 13 largest banks. Besides, its focus on the Enterprise and Government verticals (which represent about 70% of its ACV base) bode well for growth as the segments are driving demand.

The growing demand for its services, the continued momentum in its ACV base, and a high customer retention rate suggest that the run in Absolute Software stock is likely to sustain in the future.

Meanwhile, its low valuation and a decent dividend yield of 2.2% make it an attractive long-term investment option to get rich.

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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