August was a modest month for the TSX, with the index rising just 1.6%. However, one stock that stood out was Dye & Durham (TSX: DND), which skyrocketed more than 95% last month. The tech company provides services to a variety of industries, including legal and financial. Its focus is on providing industry professionals with accurate and reliable information to facilitate reviews and to help make searches of public records easy, among other services. Focusing on governments and businesses makes the company a potentially more stable investment than one that depends on the consumer market where demand can sometimes fluctuate wildly.
Since debuting on the markets in July, shares of Dye & Durham are up more than 77%. And in August alone, the stock rose by more than 80%:
What’s behind the rally?
There wasn’t any big earnings report or press release that sent Dye & Durham’s stock soaring. Instead, it was likely a combination of strong analyst recommendations and a very bullish market that helped propel the stock to such heights. In August, the S&P 500 hit a new all-time high, and popular stocks Apple and Tesla have been performing so well that they recently announced stock splits to bring their prices down.
The timing of Dye & Durham’s IPO has undoubtedly helped the company’s stock do well in its first few months on the markets, and tech stocks have been in high demand.
But is the stock worth its current valuation?
Given the rapid rise in the share price, investors may be wondering if the stock is still likely to go higher and if it’s an attractive buy right now. Its shares are currently trading at a forward price-to-earnings (P/E) multiple of more than 60 and a price-to-sales (P/S) ratio of 14. Those multiples pale in comparison to a top tech stock like Shopify, which trades at around 60 times its revenue and a forward earnings multiple of more than 400.
However, Shopify’s arguably one of the most overpriced stocks on the TSX. Tech stock Lightspeed POS, which is a bit more modest at a P/S of 22, is also trading fairly higher than Dye & Durham stock. But the big allure for tech investors is growth, and if a company doesn’t have it, it’ll struggle to attract even the most bullish tech investors.
According to its prospectus, Dye & Durham’s sales of $43.8 million rose by 35% from 2018. The company also notes that its revenue averaged a compounded annual growth rate of 71% over the past three years. By comparison, Lightspeed grew its sales by 51% in its most recent quarter while Shopify’s top line rose by 97%.
While a +30% growth rate from Dye & Durham is impressive, it may not be strong enough to sustain the stock’s current valuation. And that’s why, despite the surge in share price, investors may want to wait for the stock to cool off before investing in it. The markets as a whole are generally expensive right now, and this stock is no exception.
Dye & Durham can make for a stable long-term investment, but at its current price, investors are better off waiting in the sidelines for now and looking for deals elsewhere.
