Overvaluation Will Encounter Regulatory Headwinds And SaaS Resilience

Key Takeaways

• Over-optimism on sustained growth and margins may ignore rising competition, regulation, and technology shifts that could pressure revenue and profitability.
  
• Customer retention is vulnerable to trends in open data, government interoperability, and disruptive competitors, risking softer recurring revenue and weaker long-term margins.
  
• Sustained growth in recurring revenue, efficient SaaS adoption, disciplined R&D, expanding market presence, and prudent capital management underpin strong earnings and long-term competitive advantage.

Catalysts

Engages in the development, marketing, sale, implementation, and support of integrated enterprise business software solutions in Australia and internationally.

• The market may be excessively pricing in rapid, sustained ARR (annual recurring revenue) and margin expansion due to strong SaaS+ adoption, underestimating the risk of intensifying competition and regulatory headwinds that could slow customer wins, elongate sales cycles, or pressure pricing-ultimately impacting future revenue growth and margins.
  
• There is significant investor euphoria that Technology One's deep vertical specialization and high customer retention will indefinitely insulate it from customer churn, disregarding the increasing shift toward open data and government interoperability, which may undermine long-term account stickiness and result in softer recurring revenue/profit growth as contracts become more contestable.
  
• Current valuations could be reflecting optimism that the transition to cloud-native architectures and fast-tracked implementations (ERP in 30 days) will be universally successful, despite the rising complexity and cost of compliance with evolving data privacy and cybersecurity regulations, which could erode future operating margins and earnings.
  
• The share price appears to be discounting the risks that Technology One's product innovation cycle-despite high R&D investment-may be challenged by both global giants accelerating consolidation and the rapid emergence of disruptive, AI-driven and low-code/no-code ERP competitors, putting long-term revenue growth and pricing power at risk.
  
• Market expectations may not adequately factor in potential threats from the commoditization of core ERP/SaaS offerings and talent shortages/wage inflation, both of which could pressure gross and net margins-even as international expansion and cross-sell expectations are priced in, ultimately making forward profit estimates potentially too optimistic.

Technology One Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Technology One's revenue will grow by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.1% today to 26.7% in 3 years time.
• Analysts expect earnings to reach A$224.2 million (and earnings per share of A$0.68) by about July 2028, up from A$133.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 67.1x on those 2028 earnings, down from 99.4x today. This future PE is greater than the current PE for the AU Software industry at 53.4x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

Technology One Future Earnings Per Share Growth

Risks

• The rapid and sustained growth in ARR (Annual Recurring Revenue)-up 21% YoY and 18 months ahead of target to $500M, with strong net revenue retention (118%) and minimal churn (0.3%)-indicates resilient revenue foundations and high customer stickiness, reducing revenue volatility risk and supporting stable to growing earnings.
  
• The SaaS+ offering is being rapidly adopted, driving shorter implementation cycles, increased customer satisfaction, and higher margins due to operational efficiencies, suggesting continued margin expansion and improved profitability as consulting revenue transitions to higher-value recurring streams.
  
• Significant investment discipline, with 20–25% of revenue consistently allocated to R&D and clear evidence of past R&D generating current and future growth (AI, new products, and regular platform evolution), indicates an ability to keep technology relevant and avoid product obsolescence, supporting sustainable competitive advantage and ongoing revenue growth.
  
• Expansion into the U.K. and growth in the Asia-Pacific market, along with vertical specialization in key sectors such as local government and higher education, are diversifying revenue streams, reducing geographic and sector concentration risk, and expanding the company's total addressable market, directly underpinning long-term top-line growth prospects.
  
• Strong cash generation, a robust balance sheet, and increasing dividends with a conservative payout ratio (35% interim, aiming for 55–65% at year-end), combined with management's explicit profit and margin improvement targets (margins to 35%+), point to disciplined capital management, supporting both net margin and total shareholder return over the long term.

Valuation

• The analysts have a consensus price target of A$36.276 for Technology One based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$45.7, and the most bearish reporting a price target of just A$18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$841.0 million, earnings will come to A$224.2 million, and it would be trading on a PE ratio of 67.1x, assuming you use a discount rate of 7.9%.
• Given the current share price of A$40.38, the analyst price target of A$36.28 is 11.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.