Absolute Software Corporation (TSX: ABT) made headlines last year after it became one of the best-performing stocks on the Toronto Stock Exchange. The Vancouver-based cyber security company generated double-digit returns while the broader S&P/TSX erased three years of gains thanks to plunging energy, discretionary, and health care sectors. Looking beyond the stock price, Absolute is backed by a strong business model, recurring revenues, and high-profile clients that make future growth extremely likely.
Summary
- Symbol: ABT
- Market Cap: $362.9 million
- Annual Revenue Growth: 3.3% (June 2018)
- Free Cash Flow: $10 million
The Case for Owning Absolute Software Corporation
Absolute Software was not only the sixth best performing TSX stock last year, it managed to buck the tech-sector downtrend that began in the fourth quarter. The company, which offers endpoint security and data risk management solutions, reported a 505% increase in net income and an 88% jump in adjusted EBITDA for its most recent quarter. Total revenue for Q2 2019 was $24.4 million, a year-over-year increase of 5%. Year-to-date revenue reached $48.7 million, up 5% from the previous year.
For investors, one of the most promising aspects of Absolute’s business model is recurring revenue. The commercial recurring revenue component of the business increased to $23.4 million in the fiscal second quarter and $46.6 million year-to-date. Both numbers represented year-over-year growth of 6%.
Since 2009, Absolute Software has grown its revenue each year except one and has never reported a year-over-year decline in sales. Revenues have more than doubled over that period and appear poised to continue higher in fiscal 2019.
The company has more than 12,000 clients worldwide, including Under Armour, Cigna HealthSpring, and KCOM. It also works with some of the world’s biggest original equipment manufacturers, such as Microsoft, Samsung, Panasonic, and Toshiba. Absolute Persistence, the company’s endpoint security and protection program, has been embedded in the firmware of more than 500 million devices worldwide.
ABT Stock Continues to Outperform
The value of ABT stock jumped 12.5% in 2018, including a more than 14% rally in the first half of Q4, a period that was extremely volatile for North American markets. Since bottoming on Dec. 20, the company’s stock price would rebound more than 22% over the next three months to return above $9.00 for the first time since 2015.
The company’s price/earnings ratio is currently 42 times earnings, which is well above the market average. The stock currently maintains an ‘overweight’ rating by analysts polled by The Wall Street Journal. This means it is likely to outperform the market.
Conclusion
Absolute Software has strong value prospects based on earnings, revenue, and visibility. The company has been profitable in five of the last six years, and this is beginning to reflect in its share price. At roughly $9 per share, ABT is a good bet for investors seeking exposure to a specialized technology company with a growing international presence.
Disclaimer: Author has no investment position in Absolute Software Corporation at the time of writing.
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