Duck Creek Technologies stock fell 29% last month, opening wonderful buying window


What happened

Actions of Duck Creek Technologies (NASDAQ: DCT) decreased by 28.8% in October 2021, according to data from S&P Global Market Intelligence. The manufacturer of software as a service (SaaS) used by P&C insurance companies released strong results for the fourth quarter of 2021. The report nonetheless triggered a massive drop in prices, with market makers focusing instead on Duck Creek’s modest targets.

Image source: Getty Images.

So what

In the fourth quarter, Duck Creek revenue increased 21% year-over-year to $ 70.9 million. Adjusted earnings were $ 0.02 per share, based on $ 2.6 million in non-GAAP net earnings. This matched the reading from a year ago. Your average analyst would have been content with a fourth quarter profit of $ 0.01 per share on sales of nearly $ 69.1 million, so Duck Creek exceeded analysts’ targets across the board.

And then there is the question of orientation. Duck Creek is forecasting around $ 69 million in first quarter revenue, just above Street’s $ 68.7 million consensus at the time. However, full-year sales are expected to hover around $ 296 million as analysts expected $ 303 million for this period. It’s a forward-looking failure, and it’s not a small one.

Now what

As a fast-growing stock with meager net earnings, Duck Creek’s market value is sensitive to perceived slowdowns in the company’s revenue growth. From this perspective, the overwhelmingly negative market reaction makes sense.

However, I would say that Duck Creek management set an overly conservative annual sales target here, creating a bar that should be easy to cross. The young company is already used to doing just that, including in the fourth quarter where the top-end of management’s revenue forecast stopped at $ 69.5 million. And when the company set annual goals from the October 2020 perspective, the revenue line was expected to hit less than $ 249 million. The end result in revenue for the entire year was $ 260.4 million, leaving a lot of air between the modest target and the robust result.

In the earnings call, Duck Creek management celebrated the “strong underlying momentum” that is driving the company forward at this time. Regarding the relatively low growth rate of the sales target for the entire year of around 14%, CFO Vinny Chippari noted that the expiration of a single existing contract explains most of this. action. Excluding this contract from the 2021 figures would bring the forecast for next year to an effective growth rate of 30%. And none of this should surprise investors:

“It was a deal inherited from Accenture in 2016 that we have known for a long time is going to be phased out,” Chippari said. “This contract expired in June 2021, so we had 10 months of revenue in 2021. And that creates a little obstacle on the rate of subscription revenue growth for fiscal year ’22.”

In other words, Duck Creek investors are overreacting to a downturn they should have seen coming a mile and a half away. Stock prices have fallen 35% in the past 52 weeks, and I am strongly tempted to take some action in this exciting financial technology company as long as the discount lasts. This action is loaded with a massive rebound over the next two years, as this troublesome legacy contract becomes a footnote in Duck Creek’s financial history.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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