3 Reasons Ultimate Software Should See A Top-Line Growth Surprise Next Year

Wedbush Securities has upgraded shares of The Ultimate Software Group, Inc. ULTI to Outperform from Neutral on the expectation that the company’s initial fiscal 2017 revenue guide will be “surprisingly positive” and will be a strong catalyst for the shares.

The company is expected to report its third-quarter results after the market close on Tuesday.

“We’ve been on the sidelines based on valuation, but our updated analysis of ULTI’s TAM [...] and our improved outlook for ULTI’s market momentum makes us sanguine on upside potential for ULTI shares,” analyst Steve Koenig wrote in a note.

3 Reasons

The primary reason for Koenig’s bullish thesis on the stock is the low bar of consensus revenue that calls for growth of 22 percent, which he said is conservative, given the rapid acceleration of the company’s services revenue.

Similar to fiscal 2015, Ultimate Software’s services revenue has again accelerated this year, and this time, by a large amount (18 percent in FY15 to an estimated 27 percent in FY16).

“In addition, we expect ULTI’s largest deal to date (a 185,000-employee hospitality customer) to go live in 1H17 and begin to generate recurring revenue,” Koenig highlighted.

Further, Koenig believes the company could benefit from its successful sales segmentation, more productivity from new sales hires and strong demand for its solutions.

Adjusted Outlook

As such, the analyst raised his fiscal 2017 revenue growth estimate by 60 basis points to 24.1 percent, saying, “[W]e think ULTI can guide at this level with room to beat.”

Moreover, Koenig’s updated analysis of the company’s total available market indicates a $10 billion–$15 billion opportunity, of which the company penetrated only 5–7 percent. This implies that the company has significant room for growth.

The analyst also raised the target price to $242 from $212.

“Looking out longer term, our estimates suggest ULTI shares could be worth $350 in FY20, based on 5x EV/revenue on FY21E ($2.1 billion),” Koenig added.

At time of writing, shares of Ultimate Software were up 0.94 percent to $210.49.