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Model N (MODN) Hits 52-Week High: What's Driving the Stock?

Zacks Equity Research

Share price of Model N, Inc. MODN rallied to a new 52-week high of $13.70, eventually closing a tad lower at $13.10 on Aug 9, shortly after the company reported its third-quarter fiscal 2017 results.

Notably, Model N stock has rallied 48% year to date, substantially outperforming the 17.3% gain of the industry it belongs to. The stock price momentum reflects the company’s expanding product portfolio, growing customer base and accretive Revitas acquisition.

We note that the company has beaten the Zacks Consensus Estimate thrice in the last four quarters and matched it once, delivering an average positive surprise of 11.32%. However, the company’s revenues missed estimates twice in the trailing four quarters.

Model N, Inc. Price and Consensus

Model N, Inc. Price and Consensus | Model N, Inc. Quote

In the third quarter, including stock-based compensation, the company incurred loss of 23 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of 27 cents. Adjusted loss of 14 cents per share was narrower than the year-ago quarter’s loss of 16 cents. However, revenues of $34.2 million missed the Zacks Consensus Estimate of $35 million, but increased 22.7% year over year.

Model N expects fourth-quarter GAAP revenues to come in the range of $34.6-$35.1 million. For fiscal 2017, GAAP revenues, after deferred revenue adjustment, are expected to be in the range of $130.2-130.7 million. Management continues to expect annualized recurring revenue (ARR) to be between $46 million to $48 million. This represents 31% to 36% year-over-year growth.

Currently, Model N carries a Zacks Rank #3 (Hold). The company has a market capital of $377.3 million and a long-term expected earnings growth rate of 10%.

Strong Fundamentals Drive Momentum

Model N’s cloud-based revenue management solutions are well suited to replace the increasingly ineffective legacy systems at companies that are finding it difficult to keep pace with the current industry trends. Its revenue management platform thus continues to attract prominent names from the life sciences and high tech field. The manufacturing and financial services markets also hold tremendous growth potential for the company.

Post the Revitas acquisition, the company has been able to expand its product portfolio and customer base. Persistent deal wins from existing and new customers is a key growth factor for Model N.

Recently, Ampleon, a radio frequency (RF) power provider, selected Model N’s revenue cloud services. A significant number of systems at companies like Smith & Nephew, Edwards Lifesciences, J&J Japan, Stryker and Shire also became operational in the quarter, ICU Medical; a Medtech company was added to its customer base during the quarter. A high-tech company called Diodes also adopted Model N’s revenue cloud model in the third quarter.

However, lack of international customers, mounting operating loss, continuing cash burn and stretched valuation are major headwinds.

Stocks to Consider

Better-ranked stocks in the broader technology sector include Alibaba Group Holding BABA, Luxoft Holding LXFT and Lam Research LRCX, all sporting a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Alibaba, Luxoft Holding and Lam Research is projected to be 28.97%, 20% and 17.2%, respectively.

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