While recent volatility experienced by tech stocks may have left many investors wary of returning to the sector any time soon, Goldman Sachs has identified three enterprise software companies that look primed to capitalise on the next leg of global growth for cloud software.
Based on their emerging but growing offshore businesses, Goldman sees substantial potential long-term upside for one smallcap tech stock ReadyTech (ASX: RDY), and large cap rivals Technology One (ASX: TNE) and Objective Corp (ASX: OCL).
Assuming they’re succeed in executing their respective domestic playbooks to achieve dominance in new markets, the broker is forecasting substantial potential long-term upside for all three stocks.
While ReadyTech is currently expanding in the UK, the broker believes Technology One is also well-placed to accelerate meaningful upside to current estimates within that market, especially given that the total addressable market (TAM) of around US$800bn is three-times larger than A&NZ.
Then there’s Objective Corp which the broker notes could follow ReadyTech – which is looking to expand into the US/Canada via its student & work pathways businesses – into the US [via acquisition] by leveraging its best-in-class government software.
The broker notes the TAM of the US market is 10 times the magnitude of the A&NZ market.
What attracts Goldman’s to ReadyTech is the deep discounted valuation to SaaS peers on a growth-adjusted basis, which the broker believes is greater than 50%.
In addition to bolt-on acquisitions, the broker believes the company is well-placed to deliver continued strong organic growth, and initiates coverage with a Buy on the stock and a price target of $5.00 – which offers 58% upside to the current share price.
"We think ReadyTech will continue to grow organically at a mid-teens growth rate, with upside from assumed continuation of bolt-on M&A," notes the broker.
Goldman also has a buy on Technology One and expects the company to meet its $500m FY26 annual recurring revenue (ARR) target.
With risks skewed to the upside, the broker expects the company to deliver on its targets at expanding profit margins, neither of which are factored into consensus or market expectations.
The broker’s target price of $13.90 on Technology One represents 27% upside to the current price.
"Long-term upside can come from Technology One's growing UK business, which after a slow start appears to have taken a positive turn recently," Goldman Sachs noted.
Goldman Sachs values Objective Corp and Technology One in-line with global peers, while ReadyTech is pegged at a -40 discount
While Objective Corp has potentially the clearest value proposition and global scalability, the broker notes the company trades at a premium multiple with relatively less earnings visibility.
As a result, Goldman initiates coverage on the company with a Neutral recommendation and target price of $19.05 – which offers 10% upside to the current price.
The broker expects optionality from bolt-on M&A - value accretive given the company's high trading multiple - and possible US expansion over time, to unlock significant incremental TAM.
"Revenue growth should be more predictable and consistent now that Objective Corp has largely transitioned its upfront perpetual licence revenue to recurring subscriptions," notes the broker.
"We forecast a solid 14% FY21-25E revenue CAGR [compound annual growth rate], driven by OCL’s faster-growing RegTech and Planning & Building segments."
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