SolarWinds Corp: Contrarian IT Stock May Be Set for Multi-Year Breakout

SolarWinds Corp (NYSE:SWI): Potential Multi-Year BreakoutSolarWinds Corp: Great Opportunity for Potential Breakout

While the tech-heavy Nasdaq continues to trade at new record highs, many technology stocks have been left out of the party. But that means opportunities to invest before possible breakouts.

This is the case with IT infrastructure management software company SolarWinds Corp (NYSE:SWI), which has underperformed. At the time of this writing, SWI stock is down 2.6% this year. Meanwhile, the Nasdaq is up 16.7%.

SolarWinds stock has been drifting in a lackluster sideways channel, with two major breakdowns (in 2019 and 2020) since the company’s initial public offering (IPO) in 2018.

I like the IT infrastructure space, especially given the rapid changes in technologies that will force companies to stay on top of things. This is where SolarWinds comes in, and why I view a potential breakout ahead.

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SolarWinds Corp’s IT infrastructure software and services are used by more than 275,000 customers worldwide to monitor and manage key IT assets in the cloud or physical locations. (Source: “Corporate Overview,” SolarWinds Corp, last accessed July 13, 2020.)

A look at the SWI stock chart shows the lack of direction since the IPO. There is support around $17.00.

Chart courtesy of StockCharts.com

SolarWinds stock could be setting up to take another run at key channel resistance around $19.24. A breakout could drive a move toward $21.00 and new record highs.

Strong Fundamentals Support Bull Case for SWI Stock

SolarWinds delivered nine consecutive years of revenue growth, from $152.4 million in 2010 to a record $932.3 million in 2019. The compound annual growth rate (CAGR) for that period is an impressive 22.3%. (Source: “SolarWinds Corp.MarketWatch, last accessed July 13, 2020.)

Fiscal Year Revenues
2017 $728.0 Million
2018 $833.1 Million
2019 $932.3 Million

(Source: “SolarWinds Corporation (SWI),” Yahoo! Finance last accessed July 13, 2020.)

There is some concern, however, given the impact of COVID-19 on the global economy. SolarWinds is estimated to see its revenue growth moderate to eight percent to $1.0 billion in 2020, followed by 10% to $1.1 billion in 2021.

SolarWinds produced generally accepted accounting principles (GAAP) profits in seven of the past nine years. The key to attracting investors is for the company to deliver consistent and rising earnings.

Fiscal Year GAAP Earnings
2017 -$351.9 Million
2018 $364.6 Million
2019 $18.4 Million

(Source: Ibid.)

Adjusting for unusual items, SolarWinds Corp made $0.85 per diluted share in 2019, and this is expected to remain flat at $0.86 per diluted share this year. There are some encouraging signs for 2021, with the company expected to ramp up its earnings to $0.97 per diluted share in 2021.

A big plus is that SolarWinds generated positive free cash flow in 10 consecutive years, including $276.9 million in 2019.

Analyst Take

Insiders have been busy buying up SolarWinds stock: over the last six months, insiders added two million shares and sold 330,534. (Source: Ibid.)

My take is that the demand for IT infrastructure solutions will provide strong tailwinds for SolarWinds Corp, which will result in a breakout for its share price.

SWI stock trades at a respectable 18 times the company’s estimated 2021 earnings per share. This supports the case for a higher share price.