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Ultimate Software: Expensive And Dilutive

Kelly Stewart profile picture
Kelly Stewart


  • ULTI is not particularly profitable. It is dilutive. It doesn't beat the risk-free rate. And it is trading at a significant premium.
  • ULTI's current P/E - 564 - trades at a significant premium to both market averages as well as its own historical multiples.
  • Worse, there is significant optimism embedded in ULTI's shares. With a forward P/E of 46, ULTI has a price-implied one-year earnings growth expectation of over 1202%.
  • If its earnings yield is significantly less than the risk-free rate, in my opinion, it's not worth the excess risk of its shares.

The Ultimate Software Group (NASDAQ:ULTI) is a company offering web-based payroll and workforce management software. It is a company that's not particularly profitable. It is a company that is dilutive. It is a company trading at a significant premium. Finally, looking at its price-implied earnings growth assumption, it is a company with a significant amount of optimism embedded into its price.

With an earnings yield that doesn't beat the risk-free rate, in my opinion, investors would do well to avoid it.

First, let's talk about dilution.

Share Dilution

ULTI has diluted its shares significantly, diluting shareholders over 25% in the last decade alone.

Source: YCharts

As my readers know, one of the first things I look at when I analyze a company is its history of share dilution. When a company issues additional shares, an existing investor's ownership stake in the company is reduced. This harms investor returns and should be avoided.

To demonstrate how dilution harms returns, I'll use the following thought experiment.

1. I'll assume that the next ten years resemble the last ten years, and ULTI increases its share count by 25%.
2. I'll assume ULTI manages to double its revenue in that same period.

Even with that revenue growth, because it diluted its shares, shareholder return would be muted. To demonstrate just how much, let's assume you buy 100 shares of ULTI today at ~$54 when it has 30.57m shares outstanding.

Source: Author's Compilation

As I said, we'll assume that over the next ten years ULTI doubles its revenue. And, let's say, that because ULTI investors love to reward revenue and nothing else, the stock price reflects that. Your risk has paid off!

But ULTI has issued 25% more shares, so now there are over 38m shares outstanding.

Source: Author's Work

Holding all else constant: instead

This article was written by

Kelly Stewart profile picture
Check out my tipranks: https://www.tipranks.com/bloggers/kelly-stewartContrarian. Former CEO of a small publishing company. I've been researching stocks for several years now, and my philosophy is geared towards the preservation of capital as the most important goal of investing.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

Chris Devlin profile picture
I've seen quite a few short's on very profitable SaaS business and thought this might help clear up some of the misunderstanding...

Siro Capital profile picture
Chris, that is a fantastic and easy to understand article about why SaaS businesses can be healthy yet GAAP income unprofitable. Kelly would be well served to read it instead of continually bashing growth SaaS firms.
11 Mar. 2018
Well said Medguy.
Full disclosure, I’m also a long term holder and beneficiary of ULTIs’ great success during the past 15+ years.
Overtime it’s been easy on SO many occasions to reach the “sell now/over valuation” conclusion of the author.
I agree much of this authors “generic” analysis as it applies to ratios and valuation measures.
What the author fails to provide is an understanding as to what separates (for 20 years) ULTI from other pioneer SaaS providers (leadership at CEO level, best of breed culture recognized by Fortune, Forbes, etc, profitability, growth over long term, client stickiness, best customer service, consistent r&d deliverables, etc).
These are a few of the characteristics that set apart competitors in the gladiatorial world of software services.

Where I believe the author strays is a failure to acknowledge the “best of breed growth companies” concentrate on executing the above first and if successful the market rewards with premium valuations.
In the long run successful growth business’ shift focus toward incremental gross and net margins as the business mature.
This is not the case for a company growing annually at 20%+ for past 20 years that barely serves 10% of its domestic market; and that doesn’t even considering global growth prospects of an excellent SaaS provider.

Like Medguy; I see $300+ (not in a straight line of course) as ULTI crosses the $1billion sales threshold this year ($941mm in ‘17) enroute to $2 billion!

ULTI’s priority concentration on excellence in hiring, training and retaining talent, customer service and putting shareholders (like me) third in line has been rewarding.
Having been a shaholder here for more than 11 years the performance "left over" after the dilution has been quite acceptable. I actually think your premise is wrong or weak when evaluating growth companies. But we are all entitled to our own beliefs. Going forward you may not be factoring in their new generation, their expanding portfolio gaining increased wallet share of clients, their expanded range to small and larger companies. Then there are price increases and a developing international exposure. BTW they have been voted among the best companies to work for in more than one country already. We see over $300 in 3-5 years.
Why do you use such low stock prices in your image? Today's price was $253.88.
09 Mar. 2018
Wow; what a simplistic; common
PSalerno profile picture
You are right, ULTI is on my watch list as a short candidate. It is mostly hold by institutional investors, so a general market correction is probably needed to make serious money on the short side, but when institutional investors sell, they sell at the same time with strong price movement.
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