Kinaxis Inc. Shares Rise +14% in 2 Days: Could This Be a Return of Share Price Growth Momentum to the Stock?

Should investors expect Kinaxis Inc.’s (TSX:KXS) share price to continue rising after the stock rebounded 14% early in November?

| More on:
The Motley Fool

Shares of Kinaxis Inc. (TSX:KXS) rose 14.6% in the last two trading days of last week after the tech growth firm reported some good third-quarter (Q3 2017) results on Wednesday, November 1. Investors could expect a return of share price growth momentum on the stock.

Kinaxis is one of the leading supply chain management solutions providers with its flagship software offering, the Rapid Response package, generating sustainable growth momentum and battling it out with other global powerhouses, such as the likes of SAP SE in Germany and JDA Software Group Inc. in the United States.

Kinaxis’s stock has become very volatile after some bad news on August 8, when it tumbled 21% to hit a low of $63.66 on August 10, as investors were disappointed by a US$10 million downward revision to the company’s 2017 revenue guidance and a new business strategy that threatened to slow down professional services revenue growth.

Some investor confidence might have returned to the stock after Kinaxis reported stellar Q3 2017 results and the stock rebounded significantly.

Could this be a sign of a return to share price growth momentum to Kinaxis’s stock?

Possibly.

Kinaxis continues on a steady growth path after reporting a 24% growth in subscription revenue in Q3 as compared to the same period last year. Subscriptions are the main revenue growth driver going forward.

The company has adjusted its revenue growth guidance for the year by US$1 million from the US$131-133 million guidance given in August to a new range of US$132-134 million.

Most noteworthy, the company has also guided for a 22-23% subscription revenue growth for 2017, which puts the company’s core revenue driver in a high growth category in the industry, potentially justifying the high 91 times trailing price-to-earnings (P/E) multiple on the stock price.

Kinaxis has recorded sequential quarter-on-quarter growth in gross margins this year, rising from 68% in the first quarter to 70% of revenue in the second quarter before hitting 71% in the third quarter. This significant profitability improvement has gone on to boost the bottom line too.

Another notable achievement for Kinaxis was in its recent cost-management performance, where selling and marketing expenses have fallen from being 27% of revenue in the third quarter of 2016 to 21% of revenue in Q3 2017.

However, I do expect selling and marketing expenses to grow this quarter and the next, since the company expenses all deal-negotiation costs in full upon the first revenue recognition for new contracts, but management seems to be upping their cost-management stamina, as depicted in the sequentially rising adjusted operating profits (adjusted EBITDA) to 59% of revenue last quarter.

Potential problem

Kinaxis has since cancelled its contract with the problematic large Asian client which caused the revenue guidance revision in August, and the matter has gone for arbitration. The client alleges breach by Kinaxis and has asserted counter claims. If Kinaxis loses the case, it may have to write off about US$2.5 million in revenue recognized before March 30, 2017.

Investor takeaway

Kinaxis’s growth story continues, even as professional services revenue is shared with technical partners.

Management foresees the company realizing exponential growth going forward, as the new partners accelerate subscription revenue growth through their more privileged direct engagement with end-users.

Most interesting, the company holds no long-term debt in its capital structure, leading to a lower-risk profile. Furthermore, Kinaxis enjoys almost 100% revenue retention from its sticky multi-year client contracts, bolstering the case for sustainable revenue growth.

However, Canada segment revenue continues on sequential decline. It would be great for the company to grow in its home market.

I am expecting a sustained double-digit revenue and profitability growth momentum for Kinaxis in the long term, which may be accelerated by the new technical partners’ involvement and supported by the company’s elevated capital expenditures, which may total US$10-11 million this year.

However, as discussed earlier, a $100 share price may not be realized in the near term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any stocks mentioned. Kinaxis is a recommendation of Stock Advisor Canada.  

More on Tech Stocks

person on phone leaning against outside wall with scenic view at airbnb rental property
Tech Stocks

3 Canadian Growth Stocks to Buy for Long-Term Returns

These three growth stocks may be down now, but don't count them out, especially for long-term growth.

Read more »

An investor uses a tablet
Tech Stocks

If I Could Only Buy 2 Stocks in 2025, These Would Be My Top Picks

Are you looking for stocks you can buy in 2025 and be confident of good returns? Consider buying these two…

Read more »

Canadian Dollars bills
Dividend Stocks

2 Incredibly Cheap Canadian Growth Stocks to Buy Before It’s Too Late

Buying cheap stocks needs patience and a long-term investment approach. Only then can they give you extraordinary returns.

Read more »

dividend growth for passive income
Tech Stocks

2 Canadian Growth Stocks Set to Skyrocket in the Next 12 Months

There are some great growth stocks out there for investors to consider, but of them all these two look like…

Read more »

A small flower grows out of a concrete crack.
Tech Stocks

Got $3,000? 2 Monster Growth Stocks to Buy Right Now Without Hesitation 

Here is a method to identify monster growth stocks in which you can invest $3,000 and let your money grow…

Read more »

hand stacks coins
Tech Stocks

2 Stocks That Could Turn $100,000 Into $1 Million

When it comes to winning growth stocks, these two have made millionaires time and again.

Read more »

AI microchip
Tech Stocks

2 Canadian AI Stocks Poised for Significant Gains

If you are looking to ride a decisive bull market phase from the beginning, discounted AI stocks in Canada might…

Read more »

Woman in private jet airplane
Tech Stocks

Could This Undervalued Canadian Stock Be a Millionaire-Maker? 

Futuristic growth stocks can be your ticket to millionaire status.

Read more »