- Buy for value alpha below $3.40
- Buy for momentum alpha $below $3.70 only if price is rising
Aconex is high growth, high volatility stock with a turnover of $2.5m per day. Because of the uncertainty around future cash flows it is likely to be more difficult for discretionary investors to make perfect decisions. A daily turnover of only $2.5m also means that it probably doesn’t move the needle on annual performance for funds with >100m AUM.
- Leading provider of cloud based collaboration software for construction industry.
- Current revenue of 250m, potential future target of 3.5b based on industry size estimate.
- Revenue realised as a % of construction cost which means that 70% of forward revenue is from existing contracts and is already known.
- 50% of revenue currently from ANZ region.
- Competitive advantage is the strong brand created by being a global first mover.
- Risks to further growth are potentially inefficient acquisitions. Buying horizontal competitors rather than niche vertical tech improvements could be costly to integrate.
Our valuation method is first to calculate a high certainty terminal value per unit of revenue. Then we proceed to make an assumption as to how many years of growth the company has before reaching its mature, terminal value.
ACX current profit margin is approx 11%. Mature software firms can have much higher profit margins such as Integrated Research with 30%. We decided to assume that 20% profit margin is easily attainable if ACX were to cut costs on expansion efforts.
Its highly likely that at least up until the next earnings release the market is going to price in 20% growth for anywhere between 2 and 5 years (current growth is >20%). To maintain a 2:1 payoff ratio, buy for value below $3.40.
If only real money is buying at $3.40 and won’t sell it until $3.97 or higher, it is profitable for fast money or trend followers to buy up to $3.70 (half the gap). Therefore buy during momentum below $3.70 (when there’s green candles).