Tax Systems plc (AIM:TAX), is a GBP£61.74M small-cap, which operates in the software industry based in United Kingdom. The sector has significantly been impacted by technology megatrends, which have changed how industrial and consumer-oriented companies operate. Tech analysts are forecasting for the entire software tech industry, negative growth in the upcoming year . Below, I will examine the sector growth prospects, as well as evaluate whether TAX is lagging or leading in the industry. View our latest analysis for Tax Systems
What’s the catalyst for TAX’s sector growth?
The battle for competitive advantage has led businesses to adopt new the cutting-edge technology, or risk being left behind. Many technologies are now coming into their own as their power and speed increase and the cost of delivering them goes down. And some are pursing growth through various strategies including new M&A, collaboration and alliances, as well as cost reduction and organic growth. In the previous year, the industry saw growth of 0.68%, though still underperforming the wider UK stock market. TAX leads the pack with its impressive earnings growth of 55.98% over the past year. This proven growth may make TAX a more expensive stock relative to its peers.
Is TAX and the sector relatively cheap?
The software tech sector’s PE is currently hovering around 26x, higher than the rest of the UK stock market PE of 18x. This means the industry, on average, is relatively overvalued compared to the wider market. However, the industry did return a higher 15.71% compared to the market’s 12.78%, which may be indicative of past tailwinds. Since TAX’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge TAX’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? TAX recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto TAX as part of your portfolio. However, if you’re relatively concentrated in tech, you may want to value TAX based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If TAX has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the tech industry. Before you make a decision on the stock, take a look at TAX’s cash flows and assess whether the stock is trading at a fair price.