Magic Software Enterprises Ltd’s Attractive Valuation & Financial Growth Support Chart Breakout

Strong Tailwinds for MGIC Stock on the Horizon

When a company builds its business applications in-house, there’s often a need for third-party solutions. Consider Magic Software Enterprises Ltd (NASDAQ:MGIC), which provides proprietary software to help companies develop robust business applications.

Based in Israel, the company sells to clients in more than 50 countries via an expansive network of over 3,000 independent software vendors. Magic Software Enterprises Ltd also has relationships with systems integrators, distributors, resellers, consultants, and original equipment manufacturer (OEM) partners.

Compared to the Nasdaq and S&P 500, Magic Software stock has easily outperformed on a year-to-date and year-over-year basis.

Versus the Nasdaq, MGIC stock’s valuation is compelling.

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Magic Software Stock Broke Out But a Dip Could Be Coming

MGIC stock established a record price of $21.02 on September 13, and in the process, it clipped the $1.0-billion mark in market cap.

Despite the strong relative performance, Magic Software stock still has a reasonable valuation that could drive bigger gains.

The following chart shows the upside trade gap breakout by MGIC stock from the accumulation channel.

Chart courtesy of StockCharts.com

Watch for a possible dip by Magic Software stock on the weakening relative strength and a reversal by the moving average convergence/divergence (MACD) to a sell.

The major downside risk is the previous channel resistance level at $17.50 to $18.00, followed by $15.00. I view this potential downside move as an opportunity.

Magic Software Enterprises Ltd Has Strong Fundamentals

Magic Software Enterprises Ltd’s five-year revenue picture shows double-digit growth over the last four years. The company drove its revenues up by 84% from 2016 to a record $371.2 million in 2020.

The company’s revenue compound annual growth rate (CAGR) was a healthy 16.5% during this time.

Fiscal YearRevenues (Millions)Growth
2016$201.7N/A
2017$258.128.0%
2018$284.410.2%
2019$325.614.5%
2020$371.214.0%

(Source: “Magic Software Enterprises Ltd.” MarketWatch, last accessed September 24, 2021.)

Moreover, the consensus revenue estimates have been rising.

Analysts estimate that Magic Software will ramp up its revenues by 22.7% to $455.5 million this year, followed by 9.1% to $497.1 million in 2022. (Source: “Magic Software Enterprises Ltd. (MGIC),” Yahoo! Finance, last accessed September 24, 2021.)

As of this writing, Magic Software is trading at an attractive two times the consensus 2022 revenue estimate.

The company has produced earnings before interest, taxes, depreciation, and amortization (EBITDA) income in five straight years to a record level in 2020 (during the COVID-19 pandemic).

Fiscal YearEBITDA (Millions)Growth
2016$32.7N/A
2017$39.621.0%
2018$44.311.9%
2019$47.77.7%
2020$55.616.7%

(Source: MarketWatch, op. cit.)

Consistent profitability has also been the case with Magic Software Enterprises Ltd. The company’s earnings per share (EPS) based on generally accepted accounting principles (GAAP) increased in three of the last four years to a five-year best in 2020.

Magic Software’s GAAP profits grew at a faster rate than its revenues did in three of the last four years.

Fiscal YearGAAP Diluted EPSGrowth
2016$0.20N/A
2017$0.3529.6%
2018$0.3910.9%
2019$0.26-32.7%
2020$0.4986.4%

(Source: MarketWatch, op. cit.)

On an adjusted basis, Magic Software Enterprises Ltd is set to earn $0.88 per diluted share this year and $0.97 per diluted share in 2022. (Source: Yahoo! Finance, op. cit.)

Another sign of the company’s consistency is five straight quarters of beating the consensus EPS estimate.

Furthermore, Magic Software Enterprises Ltd is a free cash flow (FCF) machine, generating five straight years of positive FCF, with its FCF growing by double-digits in the last three years.

Fiscal YearFree Cash Flow (Millions)Growth
2016$27.2N/A
2017$20.9-23.0%
2018$23.310.9%
2019$44.692.2%
2020$49.511.1%

(Source: MarketWatch, op. cit.)

As far as its financial situation goes, Magic Software Enterprises Ltd has limited risk, with net cash of about $45.0 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Magic Software Enterprises Ltd is expected to record a five-year earnings CAGR of 13.5%, well above the 3.4% over the past five years.

Magic Software has shown its ability to deliver strong results. Despite the appreciation in MGIC stock, the expected forward growth and attractive valuation suggest more gains.