Dye & Durham (TSX: DND) stock fell 40% in the last 12 months and 70% since the tech bubble burst on December 31, 2021. The reasons for the dip are also justifiable, as the company that accelerated its growth through acquisitions is now reversing its game.
Behind the growth stock’s 40% fall
During the 2020-2021 tech bubble, many Canadian software companies were firing on all cylinders. They were riding the bull market. Money was flowing in from several channels. They used that money to make several acquisitions and grow geographically and across verticals. However, this fast expansion proved expensive in a weak economy, and they had to re-look their business structure and prune the non-core segments.
The above story is of Dye & Durham, the practice management software that caters to legal professionals. The company had expanded its workforce management software to financial services professionals, but it is not DND’s core business. In November 2023, Dye & Durham’s management launched a strategic review of its non-core assets to reduce its debt, which stood above $1 billion as of September 30, 2023.
One reason for DND’s high debt was to fund the acquisition of Link and TM Group. But both these acquisitions failed, leaving the efforts in vain. DND had to sell TM Group UK immediately after acquiring it. DND is now using the proceeds to reduce its debt. While acquisitions are still a part of DND’s expansion strategy, its priority is to reduce net debt to less than four times its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) from 5.1.
The scope of growth in the long term
Debt reduction could help DND turn around its losses to profits. Here’s why. In the year ending June 2023, its operations earned a profit of $89 million. But its net finance cost (which includes interest on debt and processing cost of raising debt) was a whopping $131.8 million.
There is demand for DND’s software. Its annual recurring contractual revenue has more than doubled to $116.7 million in the September 2023 quarter (up from $53.8 million a year ago). It is earning 27% of its revenue from contracts and aims to increase it to over 50% in the next three years. Recurring revenue can help stabilize its revenue and generate higher profits.
Moreover, the company is looking to reduce its exposure to the real estate vertical to 33% by expanding into more verticals. DND is in the early stages of growth. It could generate long-term growth as it expands its customer base across various verticals and keeps its platform relevant to professionals.
Investing strategy for Dye & Durham stock
Dye & Durham stock is trading near its lows, creating an opportunity to buy an early-stage growth stock at an attractive value. It is a highly volatile stock with a beta of two. Beta measures the volatility of a stock against the market, which has a beta of one. If the market moves up by 5%, a stock with a beta of two is estimated to move up by 10%.
For instance, DND’s stock price surged 50% from its October 2023 dip, while the TSX Composite Index surged 12.7%. DND stock is currently sensitive to interest rates because of its high debt. You can consider buying 100 shares of DND while it trades below $13. Any interest rate cut could send the stock soaring. You can hold 50 shares for the long term and keep 50 shares for any opportunistic profit booking. DND stock could surge to $20 on positive market momentum.
As DND stock is trading closer to its bottom, its downside is limited. But it has significant upside potential. However, invest only the amount you can keep away for another five to seven years, as the stock’s volatility could bring fluctuations in your portfolio value.
