Instructure Appears Set for More Gains
Given the surge in the technology segment in 2017 and the breakout of the NASDAQ at 7,000 this week, it has become increasingly difficult to find any value in the current market, but that doesn’t mean we stop looking at high-prospects stocks.
An intriguing small-cap cloud learning applications provider that has been delivering impressive growth is Instructure Inc (NYSE:INST), which surged 64.3% over the past year and is easily outperforming the NASDAQ and S&P 500 on an alpha basis.
At this juncture, there is plenty of growth discounted into INST stock, but the price is not outrageous, given the growth metrics.
Instructure is another hot small-cap cloud applications play that focuses on helping academic institutions and companies deal with their learning initiatives via online and/or traditional face-to-face learning. The platform is open source, meaning users can easily adapt their learning process to the cloud solution offered by Instructure.
The solution is widely accepted in over 40 countries. In all, there are in excess of 2,000 academic institutions and companies using the platform.
Impressive Growth Bodes Well for INST Stock
A look at the revenue picture supports my bull thesis for Instructure stock.
Consider that Instructure grew revenues by 66% to $73.19 million in 2015 and a lower but impressive 51% to $110.88 million in 2016.
As we head forward, revenue growth is set to slow to 38.6% to $153.71 million in 2017, which is still pretty darn good. Revenues are then set to increase 30.9% to $201.27 million in 2018. (Source: “Instructure, Inc. (INST),” Yahoo! Finance, last accessed January 4, 2018.)
Don’t be too concerned about the slowing growth as this is typical when smaller companies begin to ramp up their revenue side. Just look at some of the growth rates of the large-cap technology companies and you’d understand what I mean.
For a software company, gross margins are key and should always be over 50%. In the case of Instructure, the company has managed to control the cost side and expand its gross margins to 71% in 2016, following 67% in 2015 and 65% in 2014.
The thing missing from Instructure is that the company has yet to turn a profit. However, that may be around the corner in 2019 in the best-case scenario as long as gross margins are strong.
INST stock has strong institutional ownership, including a nine-percent stake by Nine Ten Capital Management LLC. My view is that support from pro money is a bullish sign.
There is no doubt in my mind that the market for advanced online learning solutions is just beginning to take off and this will provide strong tailwinds for INST stock.
The chart shows INST stock holding in a sideways pattern with support at around $32.00, representing the price prior to the upside trade gap in September. This stock has retrenched to cover the gap. Look for a retest of resistance at $36.00. A breakout could drive Instructure to above $40.00 and the next bull leg up.
Chart courtesy of StockCharts.com
While Instructure is still not profitable, the rising revenues and gross margin expansion will drive profits, helping to attract buying in INST stock.