Undervalued ASX stocks can be a great opportunity to deliver outsized gains if we buy the right ones at the right price. In this article, we're going to look at SiteMinder Ltd (ASX: SDR).
It's important to remember that not every undervalued business will rise to a higher valuation in the future – they may always be undervalued for various reasons. What could be the catalyst to send the business higher?
There are a couple of major catalysts why SiteMinder could be a top investment. I'm not suggesting we could invest $5,000 today and turn it into $1 million, but good returns from an investment could help grow a portfolio at a faster pace towards becoming a millionaire.
While the SiteMinder share price has almost doubled since the start of 2023, it has dropped more than 10% since October 2024, so I think now could be a good time to consider an investment.
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Strong growth
Firstly, the hotel software business is delivering pleasing revenue growth, with more expected. This is helping it become a significantly larger business.
In FY24, the company reported total revenue growth of 26% to $190.7 million, which is strong progress in one year.
It also reported a 16.2 rise in subscription revenue, with the number of subscription properties increasing 13.8% to 44,500. Transactional revenue rose 30%, with the number of transaction products adopted by customers increasing by 32.2% to 26,300.
Excitingly, SiteMinder said the strong growth in properties, with an increasing focus on larger properties, would "support future revenue momentum".
The company is targeting 30% organic annual revenue growth in the medium term, which is an excellent rate for an undervalued ASX stock, in my view.
In addition, SiteMinder advised in its FY24 result announcement that it had embarked on a smart platform strategy with "significant new products and programs" to be launched in FY25.
Compelling profit growth?
While revenue growth is great, profit growth can be even more important. Investors usually value a business based on the profit generation and what's expected in the future.
As a software business, SiteMinder is capable of achieving high profit margins. It just needs higher revenue to flow through the business for those margins to keep growing.
In the last few years, the company has been steadily working towards breakeven. In FY25, it expects underlying operating profit (EBITDA) and underlying free cash flow to be positive.
SiteMinder also expects to make progress on the rule of 40, which is the sum of a software company's revenue growth and profit margin. Improvement here would demonstrate its capability of being a strong performer in the coming years.
In the next few years, I expect SiteMinder to impress the market with more hotel wins, strong revenue growth, and higher margins. Its current valuation could make it an appealing undervalued ASX stock today.
