Technology stocks have been largely consigned to the dust bin this year, but that means there are now some absolute bargains out there.
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Regular readers would be well aware that ASX technology shares have suffered greatly this year.
The S&P/ASX All Technology Index (ASX: XTX) has plunged 28% year-to-date, but the smaller companies have seen their valuations shrink even more.
One such business is human resources and payroll software provider Elmo Software Ltd (ASX: ELO).
The stock has lost almost 40% so far this year, and it has halved in value if you go back to November.
In fact, it has never been able to touch its pre-COVID high.
“Software service provider Elmo Software is a $244 million software service provider whose numbers look to be improving,” said Shaw and Partners portfolio manager James Gerrish in a Market Matters Q&A.
“But the market’s clearly not convinced as the stock [is] struggling to regain half of this year’s losses, let [alone] the drop since early 2020.”
Investment phase over, break-even coming soon
Gerrish is right in that Elmo’s finances are on the way up.
Just last week, the software company provided an update that saw revenue up 30% for the 2022 financial year and positive guidance for 2023.
And importantly during this climate of rising interest rates, Elmo management declared it would reach break-even for its operational cash flow during the current financial year.
“The investment phase has been materially completed and the existing cost base will be leveraged through FY23,” said chief executive Danny Lessem.
“We are now experiencing the benefits of scale as a result of the many years of growth and investment into the product and team.”
The stock price did enjoy a nice burst upwards of 17% that morning.
Going for cheap compared to rivals
“As we’ve seen over the last week with the buy now, pay later space, when these out[-of-]favour stocks bounce it can be hard and sharp,” said Gerrish.
“But picking exactly how far they will ultimately fall is more guesswork than science — but it does look like ELO is looking for a low.”
His analyst Jules Cooper reiterated the buy recommendation from the Market Matters team. He put a price target of around $7.60, which is a juicy 171% gain from the current level.
“Elmo continues to represent good value trading on an FY22 EV/revenue multiple of 2.8x vs US peers such as Paycom Software Inc (NYSE: PAYC) and Paycor HCM Inc (NASDAQ: PYCR) trading on multiples of 14.6x (Dec 2022) and 10.1x (Jun 2022) respectively.”
Cooper’s peers broadly agree. Five out of six analysts surveyed on CMC Markets currently rate the stock as a buy.
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Motley Fool contributor Tony Yoo has positions in Elmo Software. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Elmo Software. The Motley Fool Australia has positions in and has recommended Elmo Software. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.