We came across a bullish thesis on Tyler Technologies, Inc. (TYL) on Andvari’s Substack by Douglas Ott. In this article, we will summarize the bulls’ thesis on TYL. Tyler Technologies, Inc. (TYL)’s share was trading at $605.86 as of Oct 25th. TYL’s trailing and forward P/E were 110.76 and 57.14 respectively according to Yahoo Finance.
A team of software engineers at desks working on code for a cutting-edge cloud computing solution.
Tyler Technologies, a software as a service (SaaS) provider, reported strong financial momentum in its third-quarter 2024 results, driven by significant revenue and SaaS growth. Total revenues increased by 9.8% year-over-year to $543.3 million, with organic growth at 9.4%. SaaS revenues rose an impressive 20.3% to $166.6 million, marking nearly 20% organic growth, while operating income outpaced revenue gains. GAAP operating income surged 29.5% to $82.8 million (15.2% margin), and non-GAAP operating income grew 12.4% to $137.8 million (25.4% margin). Most notably, free cash flow rose 55.5% to $252.9 million, a robust indicator of Tyler’s profitable expansion as it transitions clients to cloud-based products hosted by AWS, targeting higher operating margins over the next decade.
Since its 2019 shift to a “cloud first” model through an AWS partnership, Tyler has pivoted from offering on-premise solutions to exclusively cloud-hosted SaaS, seeing public sector clients increasingly adopt its subscription services. Subscription-based contracts accounted for over 97% of new contract values in recent quarters. Tyler has been steadily converting existing clients to cloud-based software, completing over 100 customer migrations per quarter, leading to SaaS revenues surpassing traditional maintenance revenues, which are expected to decline as Tyler fully transforms into a subscription-based software provider.
New customer wins in various public sector niches highlight Tyler’s strategic expansion. Through cross-selling and acquisitions, notably the NIC acquisition in 2021, Tyler has added payments capabilities, recently securing a major Enterprise Payments contract with California state agencies and a multi-product deal with Fort Collins, Colorado. Tyler also made a breakthrough with Kentucky’s statewide court system, reflecting its growing foothold as more government entities replace outdated, in-house solutions with Tyler’s specialized platforms.
Tyler’s strategic evolution has catalyzed growth in its cash flow and FCF per share, which has compounded at a 19.4% rate over nine years, reaching $11.96 currently. Strong cash generation has enabled Tyler to pay down $1.2 billion in debt within three years, positioning it well for future acquisitions or potential shareholder returns. While Tyler’s current valuation is high, its revenue predictability, 98% client retention rate, and strategic market expansions provide durable value. Assuming 10% revenue CAGR, improved EBITDA margins, modest shareholder dilution, and a conservative multiple contraction, Tyler could deliver a 7.4% annualized return over six years, which, while modest, reflects the premium market view of its resilient, cash-generative business model.
The investment thesis for Tyler Technologies is centered on its strong growth in SaaS revenues driven by a successful transition to a cloud-based subscription model, coupled with a robust cash flow generation and strategic acquisitions that enhance market share in the public sector. With high client retention and the potential for continued margin expansion, Tyler represents a compelling long-term investment opportunity despite its current high valuation.
Tyler Technologies, Inc. (TYL) is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 27 hedge fund portfolios held TYL at the end of the second quarter which was 25 in the previous quarter. While we acknowledge the risk and potential of TYL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TYL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.
Disclosure: None. This article was originally published at Insider Monkey.