Industrial software provider AVEVA (LSE: AVV) started the day as the biggest FTSE 100 gainer following its full-year results.
I was a bit taken aback when I looked at the results statement though. This was because for the year ending March 31, the company’s statutory results were actually weak. Both revenues and operating profits were down.
Why is the AVEVA share price rising?
So why the share price jump? I think the increase is down to two reasons.
One, besides statutory numbers, AVEVA also released combined numbers with OSIsoft, which it acquired last year. These look somewhat better. Revenue is still down, by some 1.4% to be precise. Because AVEVA is a much bigger entity, its revenue decline impacted the wider group’s numbers more than standalone revenue growth for OSIsoft.
But OSIsoft is clearly a much more profitable company than AVEVA. Because of this, combined pre-tax profits for the group have increased by a huge 166%. This is clearly a reason to feel positive about the stock, if you ask me.
Two, AVEVA’s results have been dragged down because of the pandemic’s impact on the first half of the year. But in the second half, it saw double-digit revenue growth. This is encouraging when assessing what lies ahead for the company.
Indeed, the company was positive in its outlook. It said that “ongoing digitalisation of the industrial world continues to drive demand for AVEVA’s software”. It has pointed out positive customer feedback on the combined entity too. And also said that “trading has started well” in the current financial year, even though it is still early days.
Competitive share price
It looks like there are better days in store for the AVEVA share price. I also like that its price-to-earnings (P/E) ratio is moderate at 30 times, according to my quick calculations after its results.
As a side note though, I would like to point out that there are a bunch of varying P/E numbers available for the company from different sources, which may be confusing. If in doubt, as I was, I would also consider other valuation measures and earlier share price trends, besides making my own estimates.
What can go wrong
The one red flag for me regarding the AVEVA share price is its recent fluctuations. Pre-pandemic, the stock was broadly on the rise. But last year’s events turned its performance volatile.
Chances are that as the economy recovers and so does its performance, the AVEVA share price can restart a broadly consistent upward journey. But it does work with clients in cyclical industries, making it more vulnerable to global economic fluctuations. Besides this, it is in a competitive field with a potential to be upset by disruptive technologies.
My takeaway
Fo now, I am not rushing to buy. I would consider the above factors before buying AVEVA, or at least wait for another set of results before taking a call on it.
