ELMO (ASX:ELO) share price tipped to jump 54% higher from here

This tech share could be heading higher…

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The ELMO Software Ltd (ASX: ELO) share price is recovering on Tuesday morning following a sizeable pullback on Monday after the release of its full year results.

At the time of writing, the cloud-based human resources and payroll software company's shares are up 2% to $5.07.

How did ELMO perform in FY 2021?

For the 12 months ended 30 June, ELMO reported annualised recurring revenue (ARR) of $83.8 million. This was up 52.1% on the prior corresponding period. This was driven by a combination of organic growth and the benefits of acquisitions.

Also heading in the right direction was its underlying earnings before interest, tax, depreciation and amortisation (EBITDA). It came in at $0.4 million in FY 2021, compared to a $2.9 million loss in FY 2020.

So why did the ELMO share price drop?

The weakness in the ELMO share price on Monday was likely to have been driven by concerns over its churn levels.

The company's ARR churn was 11.6% for its ELMO business and 13.6% for its Breathe business. The former was up from 7.8% year on year.

However, it is worth noting that this was driven by the impact of COVID-19 on its customers. This could mean a significant improvement next year if the COVID situation doesn't escalate globally.

Management chat

I was fortunate enough to be in a position to have a chat with ELMO CEO Danny Lessem following the release of the result.

Mr Lessem was deservedly pleased with the company's performance during the year and optimistic on the year ahead. Particularly given how the company is well-placed to benefit from improving business confidence and the increase in remote based working. The latter is driving the adoption of cloud-based business tools.

This is expected to support a return to pre-COVID growth levels and underpin further operating leverage.

I asked the CEO about acquisitions, given that ELMO finished the period with a cash balance of $81.9 million. While ELMO continues to look for strategic acquisitions, Mr Lessem notes that M&A multiples are a lot higher now than when the company acquired Breathe and Webexpenses. As such, there are slim pickings in the space.

Is the ELMO share price in the buy zone?

According to a note out of Morgan Stanley, the broker sees a lot of value in the ELMO share price and has retained its overweight rating.

And while the broker has cut its price target to $7.80, based on the latest ELMO share price, this still implies potential upside of ~54% over the next 12 months.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Elmo Software. The Motley Fool Australia owns shares of and has recommended Elmo Software. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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