Valued at $925 million by market cap, Dye & Durham (TSX: DND) went public in July 2020 after pricing its initial public offering at $7.50 per share. The stock touched an all-time high of $53 in February 2021 and currently trades 74% below record levels. Let’s see if the TSX tech stock can stage a comeback in September 2024 after trailing the markets in the last three years.
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An overview of Dye & Durham
Dye & Durham is among the world’s largest legal software providers. It provides mission-critical systems that support enterprises in managing risk by accessing proprietary and non-discretionary data needed for legal transactions. Its software streamlines and automates client intake and onboarding processes, allowing legal professionals to generate new business, improve customer engagement, and manage compliance requirements.
DND stock’s underperformance may seem confusing to market participants, as the company has increased revenue by 69% annually in the last five years. So, let’s dive deeper.
Slower revenue growth and rising interest expenses
I believe there are three major reasons for the weak performance of Dye & Durham stock. First is the company’s decelerating revenue growth. After increasing sales by 219% to $209 million in fiscal 2021 (ended in June) and by 127% to $475 million in fiscal 2022, its revenue declined by 5% to $451 million in fiscal 2023. In the last 12 months, Dye & Durham’s sales are down by a marginal 0.6% at $457.8 million.
Like most other tech stocks, Dye & Durham enjoyed robust demand amid the COVID-19 pandemic. However, as economies reopened and inflation raised its ugly head, the rising cost of debt and a sluggish macro economy acted as headwinds for the company.
Second is the company’s narrowing profit margins. In fiscal 2019, Dye & Durham reported sales of $43.8 million, a gross profit of $41.3 million, and an operating profit of $16 million. This indicates that the company’s gross margins stood at 94.3% while its operating margin was over 35%.
In the last 12 months, Dye & Durham’s gross margins have fallen to 90.5%, while its operating margin has declined significantly to 14.5%.
Third, the company’s rising debt balance has spooked investors due to the steep rise in interest rates. Its long-term debt increased from $128.2 million in fiscal 2019 to $1.33 billion at the end of the March quarter. In this period, its interest expenses rose from $7.3 million to $151.6 million.
Is DND stock a good buy right now?
As historical performance does not matter much to current and future investors, let’s see if Dye & Durham is a good stock to buy right now. It’s evident that the company has to generate enough cash flows to support organic growth, target accretive acquisitions, and service its debt payments.
Dye & Durham recently published its preliminary results for the fiscal fourth quarter (Q4) of 2024. The company reported revenue of $120 million, an increase of 15% year over year.
However, one key metric for investors is DND’s leveraged free cash flow of $28 million. This means the company reported a free cash flow of $28 million after including its interest payouts. Moreover, analysts expect top-line growth to reaccelerate and grow by 7.8% to $487 million in fiscal 2025. Analysts remain bullish on DND stock and expect it to surge roughly 60% in the next 12 months.
