Tech stocks, especially those which entered the TSX in the 2021 tech bubble, have been volatile. Legal practice management software provider Dye & Durham (TSX: DND) is among those. After surging almost 250% in the tech bubble, the stock has returned to its IPO price. DND stock is up for growth from this point forward as it puts behind the weak business environment and short-term headwinds and prepares for a recovery. The stock could surge triple digits if its hidden catalyst is ignited.
A hidden catalyst that could drive up Dye & Durham stock
This cloud-based software company caters to a niche market of legal professionals. Among legal professionals, almost 43% of its revenue comes from real estate transactions. The seasonal nature of the real estate market makes the second half of the year strong for Dye & Durham. The company took a hit in 2022 as rising interest rates slowed real estate transactions. While the buying activity has not yet recovered, a 25-basis point interest rate cut by the Bank of Canada has opened doors of recovery.
An increase in property settlements could boost revenue for Dye & Durham in the coming months.
Other reasons to be bullish on Dye & Durham
Dye & Durham had two failed acquisitions last year, which slowed its sales and income growth. In August 2023, DND divested its newly acquired TM Group, followed by the cancellation of the Link acquisition. While Link increased DND’s financing cost, TM Group affected DND’s balance sheet. DND completed the TM Group acquisition, which was later cancelled by a regulator. Hence, it was forced to divest TM Group. Its revenue before August 2023 includes revenue from TM Group.
Including TM Group’s acquisition impact, DND’s revenue grew 3% in the third quarter of fiscal 2024. Excluding the TM Group acquisition, revenue grew 16% year-over-year. The worst is over for DND.
What’s next is organic growth. The next six months are seasonally strong for DND. Its revenue growth could shoot up as the impact of TM Group fades. The stock has already surged 16% in the last two weeks.
If the company continues to pay down its debt and focus on organic growth, it could turn profitable. The legal software purveyor has demand for its products as it operates in a niche segment.
DND has been growing its annual recurring revenue, which now contributes 30% of its total revenue. Around 53% of its revenue comes from contract revenue. Its focus in 2024 is to reduce debt and increase its free cash flow to more than $70 million. It plans to repay up to $185 million in debt now. This debt repayment and acquisition-related costs pushed the company into losses.
Final thoughts
Dye & Durham is a stock to buy and hold for the long term. It could grow gradually and return to steady growth in the long term. However, it is a small-cap stock, which means high volatility and lower trading volumes increase the risk. Invest only the amount you are willing to lose or don’t need urgently. Alongside DND, invest in resilient growth stocks like Constellation Software and Descartes Systems.
