Daily Stock Pick for July 13, 2023

Transition periods create opportunities for investors.

Because the stock prices are based on expectations, investors aren’t sure whether a company’s transition will be successful or not.

That creates pricing mismatches we can exploit.

Today’s stock pick is a software stock undergoing a major transition as it shifts from on-premise licensing (where the customer must install it on their own hardware) to a cloud-based subscription model.

The cloud-based model will create more predictable revenue growth, stable cash flows, and recurring income – a positive for the stock price.

But in the interim, there are challenges – namely a hit to short-term revenue and increased operating costs due to duplicate costs.

And while this company’s stock has risen this year, it’s still slightly underperforming the tech sector.

As this company completes its transition, investors who get in while it’s still going on could stand to capture significant upside.

Tyler Technologies, Inc. (TYL)

Tyler Technologies focuses on providing integrated software and technology services to the public sector. Its customers include clients across the world – from the US to the UK to Canada and Australia.

And as mentioned, Tyler Technologies used to focus on “on premise” licenses, but is now prioritizing a cloud-based subscription format. The company has inked a deal with Amazon Web Services to support this new model, which is expected to bring more stable, consistent (and investor-friendly) SaaS revenue to the company.

To-date, over 60% of Tyler’s existing clients have migrated to the cloud – so it appears to be only a matter of time before full migration is achieved. This has been reflected in a 24% increase in its SaaS revenue for 1Q2023 – with SaaS revenues now comprising almost 90% of new contract value.

Outside this transition, demand for Tyler’s products have remained strong, with solid organic growth expected to continue.

Bottom line, once the transition is complete and close to 100% of Tyler’s revenues come from SaaS, it’s likely that the exact same cash flows will carry a higher multiple (as they’re more stable). The time to get in is before that happens.

To your wealth,
Felix @ Ace of Investing