Rudi’s View: How Do We Value The Future?

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The company is included in ALL-ORDS

By Rudi Filapek-Vandyck, Editor

Invest in the future is an oft provided free piece of advice to investors, including by yours truly.

After all, when major technological changes descend upon society, it’s better to own the manufacturer of the revolutionary automobile instead of having to witness your hard earned withering away in a cheaply priced company that sells carriages for live horse power.

In practice, however, this is far easier said than done.

The decade past has shown plenty of emerging, disruptive challengers that came unstuck eventually and never genuinely recovered. One look at the share price trajectory of 3P Learning ((3PL)) is all one needs to comfortably conclude there have been more disappointed shareholders than otherwise post 2015 ASX-listing.

Experiences from the likes of OFX Group ((OFX)), Appen ((APX)) or Tyro Payments ((TYR)) have not been dissimilar.

Then we have highly promising, though not yet profitable contenders such as Megaport ((MP1)) where share price volatility might be a major source for whiplash sufferings among investors across Australia.

Of course, there is also a small selection of high quality, strong growth achievers just about everyone admires where management at the helm seems to be doing all the right things, and has been for many years on end.

But then you look at the numbers underlying today’s share price and your inner voice exclaims OMG!

92 times this year’s forecast EPS! A dividend of zero point something percent!

Life aint smooth or easy for investors looking to partake in today’s future-building megatrends and as far as the more successful, sustainable success stories on the ASX are concerned; valuation constantly shapes up as a serious barrier to get on board, at least for most investors.

But look what happened –yet again– last week when an already expensive-looking share price for TechnologyOne ((TNE)) simply moved into an even higher gear to rally 17%-plus following another positive market update.

And it’s not as if that rally is only based on market sentiment either, with every analyst covering this company lifting forecasts, valuations and price targets since.

Let’s have a look at some of the changes in price targets post interim financials:

-UBS’ target lifted to $42 from $33.30 (up by 25%)
-Shaw and Partners’ target lifted to $36.60 from $29.50 (up by 24%)
-Morgans’ target lifted to $36.85 from $29.90 (up by 23%)

What makes these double-digit jumps in price target even more remarkable is that management’s guidance for the full year was only lifted by 1%, to profit growth between 13% and 17% as opposed to 12%-16%.

In comparison: Orica’s ((ORI)) interim result earlier in the month arguably represented a much bigger outperformance vis-a-vis market forecasts.

Although its shares have rallied strongly too, FNArena’s consensus target only shifted to $21.80 from $21 prior with the forward PE multiple after the rally still below the market average.

Surely, what investors are experiencing is a once-in-a-generation speculative bubble, right?

Example No 1: TechnologyOne

Successful investing in companies such as TechOne starts with the realisation, and acceptance, that good old fashioned Price-Earnings (PE) ratios might not be the best methodology when it comes to valuing high quality, high growth achievers that have all kinds of extra high quality features including stable or growing margins, a loyal customer base, real pricing power, an exciting new product line, excess cash, no asset requirements, low operating costs, and little to no debt.

After all, business models have changed dramatically over the past 2-3 decades and why should a cyclical price-taker with plenty of unpredictable risks and uncertainties be valued in the same manner as companies that almost literally churn out copious amounts of free cash flow, while generating positive growth year-in, year-out?

One methodology in particular that has gained popularity when it comes to valuing companies such as TechOne is the Rule of 40 which either combines the annual growth rate in sales/revenues with the profit margin or with the percentage of free cash flow generated (multiple variations are being used).

The idea behind this methodology is to find a balance between growth and profitability. 20% growth combined with a 20% profit margin (or free cash flow, to avoid accountancy noise) then becomes the golden benchmark.

TechOne’s sum amounts to 49 and is thus better than ideally balanced.

The Rule of 40 is widely used for SaaS companies (Software-as-a-Service) that deliver their products and servicing through the cloud.

TechOne, with a market cap now in excess of $12.5bn, is the largest SaaS company on the ASX. Last week’s interim report showcased all kinds of fresh new records for the company, but we might as well stick with this measure.

Given 40 is the benchmark and not many companies are able to operate on a number above 40 over long periods of time, not even TechOne it has to be noted, last week’s reading of 49 puts TechOne among a small selection of over-achievers internationally.

It means this company is currently on a roll, which is also the impression analysts took home after participating in a conference call with management afterwards.

As companies like TechOne are consistently operating on high profit margins, relatively small changes projected years into the future have an outsized impact on valuation models and price targets set by analysts.

Hence the question why is UBS’s price target so much higher than, say, Morgans’ comes down to UBS analysts being more confident in putting a higher number through their forward projections.

These differences don’t have to be large, as also illustrated by the impact of management lifting its FY25 guidance by 1%.

One added factor is that TechOne has built up an incredible track record since 2004 and, assisted by a successful expansion into the UK market, the company’s pace of growth has been accelerating, with lots of indications pointing towards higher growth for the years ahead.

Analysts at Goldman Sachs, for example, are convinced the new range for the years ahead is between 15% and 20% per annum.

Let’s pause for a moment and compare with Orica’s track record in recent years: its EPS fell from 64.5c in FY19 to 42.5c in FY20 to a loss of -42.5c in FY21.

Admittedly, there has been steady improvement in each of the following three years since, but this year is not expected to match last year’s 110.7c. Plus we’ll have to wait and see whether the FY26 forecast of 118.8c is something that can and will be achieved.

One additional factor to consider is that TechOne, with mission-critical services for core markets in Australia and the UK, comes with almost zero risk of unpleasant, unexpected impact from US import tariffs shenanigans, even at secondary level. Not something we can say about Orica and many others.

It goes without saying, investing in companies like TechOne is not by definition a guaranteed recipe for long-term success. There will be the occasional stumble and/or interruption, even if we assume management will achieve or exceed its target of $1bn in annually recurring revenues by FY30 at a higher margin.

Most analysts are by now convinced the company will beat its own ambition.

For your typical dyed-in-the-wool value investor all of the above smacks of over-confidence and future disaster. When the positive momentum stops, so the standard warning goes, you better not be on the register as regularly shown by companies such as [fill in names here] whose share price crashed on too much exuberance and underwhelming delivery.

Indeed, the more prominent the (out)performance of the shares, the higher the chance volatility will kick in, and it can be quite violent under the ‘right’ circumstances (or should that be the ‘wrong’ circumstances?).

Witness, for example, the trajectory in share prices of WiseTech Global ((WTC)), Xero ((XRO)) and Pro Medicus ((PME)) over the past three years. But volatility (short term) does not by definition equal ‘risk’ (longer term).

There’s but a valid argument to be made that each correction or pull back has presented a great step-in opportunity for patient investors who are willing to believe in the ongoing strong growth trajectories, and in the embedded business qualities overall.

For those already on the register, which includes myself, we have to find and develop ways to deal with the fact there are always plenty of doubters and naysayers on the sideline, but a bout of extreme volatility in the share price does not prove their opinions or reluctance carry any validity.

Personally, I prefer to own the automobile manufacturer rather than get frustrated being locked in by a cheaply valued horse wagon company, even if it pays me an oversized dividend. But I happily admit, it’s a personal choice.

My research into local All-Weather Performers has guided me towards a select group of above-average, quality performers that, in my view, deserve to be included in your standard long-term investment portfolio.

The experience from the past decade-plus shows such companies generally generate returns well above the market average, over time.

But getting on this journey, if ever, starts by accepting that measuring such companies by a simple PE multiple simply doesn’t cut the mustard, and never will.

Example No 2: NextDC

Another company whose ‘value’ cannot be simply measured via the same methodology as investors tend to apply for the banks or for the Oricas listed on the ASX is data centres operator NextDC ((NXT)).

For starters; NextDC doesn’t pay anything to its shareholders and instead at times comes cap in hand asking for more capital, plus there are no profits, which makes it difficult to calculate a multiple.

In my humble view, the ASX didn’t do the company, or Australian investors for that matter, any favour by including this company in the local All-Technology sector, suggesting this is a technology-hopeful wishing to become profitable one day.

NextDC most definitely is not that.

Probably the best comparison is with toll roads operator Transurban ((TCL)). First you build the road, which costs a lot of money and takes time and carries risks, but once it’s all in place the focus shifts to collecting cash (fees) and redistributing some of it to loyal shareholders.

It most definitely has worked for Transurban and its shareholders with those shares in 2025 not far off from their all-time record high. Transurban listed in the late 1990s.

It’s a rough comparison only. Data centres most certainly do not enjoy the same exclusivity as most toll roads do, but the world is generating ever more data and more demand for data storage and inter-connectivity, and this means demand for services is explosive and data centres can hardly keep up.

In more recent times, data centre operators such as NextDC have been linked to the GenAI megatrend, but of course, global demand is much larger and more diverse than that. And we are from the finish line just yet.

Irrespective, if anything were to happen to the buoyant outlook for AI and the infrastructure build-out that supports it, this could –potentially– have significant ramifications for an asset-heavy and capital-hungry participant that is NextDC.

If all fossil-fuel driven cars will be replaced with electric vehicles, this does not make Transurban’s toll roads obsolete. If, however, we all start using AI tools on local hardware in our homes and offices, there will be a lot less demand for data centres, creating a risk of over-supply, if only temporary.

That risk seems to have become more tangible and concrete with DeepSeek’s R1 competitor to ChatGPT and Microsoft’s Co-Pilot and similar applications. In essence, China has pierced the narrative that AI will become the exclusive property of a few megacap American corporate giants who alone have the capability to spend giga-resources on developing the next generation of AI tools and applications.

The tech war between China and the USA is real, and it looks like Zuckerberg’s Meta is willing to join DeepSeek as an open source developer, but will it derail the ongoing strong demand for data centres and for more capacity?

Of course, everything is possible, but the recent results season in the US showed hyperscalers such as Microsoft and Amazon remain steadfast in their conviction, and in their spending plans. Meta is itself investing heavily in future infrastructure and so is Blackstone, equally a major investor in data centres capacity.

History suggests there will be multiple bends and splits on the road to full capacity deployment of AI, and many alternative scenarios and variations will join the fray. Recent prognostications have nominated Australia as one of the strongest growing regions for data centre capacity demand worldwide between now and 2030.

To put an accurate valuation on a company such as NextDC, any modeling needs to take into account what the price will be for its services in the future, as well as the costs of running those centres, and all variations in between.

Good luck with that.

The key underlying thesis does not change: assuming ongoing strong demand and great execution by management, building more capacity and signing more contracts create more value for the company and its loyal shareholders.

As to how much the shares are worth in the here and now, I happily refer to Stock Analysis on the FNArena website where price targets are shown set by analysts whose daily job it is to make such assessments and calculations.

Same for TechOne, by the way.

Both NextDC and TechOne have been included in the FNArena-Vested Equities All-Weather Model Portfolio throughout most of the decade past, generating (well) above average rewards over that period.

Both stocks are included in my curated lists available 24/7 to paying subscribers:https://fnarena.com/index.php/analysis-data/all-weather-stocks/

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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(This story was written on Monday, 26th May 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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