Cornerstone OnDemand Justifies a Much Higher Price
The acceleration in the adoption of the cloud as a source for business applications is evident. In my view, the cloud offers software developers a viable avenue to market their solutions. An intriguing mid-cap cloud software technology stock that shows like it could be a big winner is human resources (HR) solutions developer Cornerstone OnDemand, Inc. (NASDAQ:CSOD).
It’s currently trading at more than $39.00, and it has a market cap of almost $2.3 billion.
At this stage, CSOD stock is displaying some signs of a pending and sustained breakout at the $40.00 level after toiling in a sideways channel after trading at $59.59 in February 2014.
Cornerstone OnDemand focuses on the development of a cloud-based HR management software platform bred toward HR departments to recruit and manage staff.
So far, the company has been quite successful in building up its broad client base of about 3,000 companies, ranging from small to large, in 191 countries.
Yet, despite the relatively strong fundamentals and growth metrics, CSOD stock has been a disappointment, down seven percent this year and underperforming the S&P 500.
My Fundamental Bull Case for CSOD Stock
Cornerstone OnDemand has grown its revenue base from almost $263.6 million in 2014 to more than $423.1 million in 2016, equating to a fairly good compound annual growth rate (CAGR) of 27%.
But, like many companies delivering strong growth, the growth rate will tend to normalize down to more reasonable levels after the initial jump.
CSOD is no different. Revenue growth is projected to moderate by 13.9% to almost $481.4 million this year, and by 15.8% to more than $555.9 million in 2018. (Source: “Cornerstone OnDemand, Inc. (CSOD),” Yahoo! Finance, last accessed October 19, 2017.)
If you are weary of the slower revenue growth for Cornerstone OnDemand, simply take a look at other mid-cap or large-cap technology stocks, and you’ll realize why the metrics are still pretty good.
In line with the revenue expansion, Cornerstone OnDemand has also managed to drive gross profits and margins higher, to the point where we saw adjusted profits in 2016.
The expected forward earnings growth looks impressive, with the company making $0.39 per diluted share in 2017, and possibly making as much as $0.86 per diluted share in 2018.
While CSOD stock is trading at a premium 53 times its 2018 earnings per share (EPS), my view is that the valuation is deserving and will likely improve as the company grows.
If Cornerstone OnDemand can deliver on its estimates, there is no reason to believe that higher gains are not around the corner.
CSOD stock mounted a strong upside push in mid-September, when the stock powered up from the $35.00 level to just below $42.00.
Chart courtesy of StockCharts.com
With CSOD stock holding its 50-day moving average, I’m looking for an upside breakout to around $45.00 if the $38.00 support holds. A strong break could propel Cornerstone OnDemand stock to over $50.00 and toward its high.