Tax Software Specialist Vertex In Buy Zone After Base Breakout

Key Points

• Vertex is currently in the buy range after clearing a seven-week consolidation on June 7.
• Trading volume was more than double the average as the stock cleared resistance above $22.98.
• Institutional buyers have the upper hand, with 79 large buyers acquiring $184.75 million worth of shares in the past 12 months. 
• That institutional buying has propelled the stock to double-digit gains in the past year and indicates optimism about its prospects. 

Tax software may not be the most glamorous business; as of today, no company in that industry has launched a virtual reality headset. However, if you’re scouting for a company with solid double-digit revenue growth that’s being snapped up by institutional investors, then Vertex Inc. NASDAQ: VERX may fit the bill. 

Vertex is currently in the buy range after clearing a seven-week consolidation on June 7. Trading volume was more than double the average. The stock overcame resistance above $22.98, as a look at the Vertex chart will show you. 

Vertex stock added to those gains in the June 8 session. 

It will remain in the buy range as long as it’s within 5% of that $22.98 high. It’s OK to buy a stock if it either rises or falls within 5% of its structure high.

Avoid Chasing A Stock That's Broken Out

However, use caution when chasing any stock too far in either direction. 

If a stock has rallied too much, a pullback, even a small one, is likely, but it may be enough to discourage new buyers.

If a stock falls more than about 6% or 7% from its buy point, it’s possible that the breakout is breaking down.

With that technical tutorial in mind, Vertex stock looks strong at the moment. There was no particular news sending shares higher on June 7, but whenever you see a stock rallying with no obvious catalyst, it’s pretty safe to chalk it up to institutional buying. 

Subscription-Based Recurring Revenue

Vertex specializes in cloud-based solutions for indirect taxes. It generates revenue through subscriptions and recurring sales. 

An indirect tax is one that’s imposed on goods, services, or transactions where the burden is shifted to the final consumer. Sales tax is the easiest of those to understand, but the category also includes value-added taxes and payroll taxes, for example. 

An indirect tax is collected by an intermediary such as a manufacturer, distributor, or retailer, who then passes on the tax to consumers by incorporating it into the prices of the goods or services.

You can see that’s quite a different process than figuring out your state or federal 1040 form. 

Fortune 500 Customers

At the end of the last fiscal year, the company had over 4,200 customers, including the majority of the Fortune 500. It provides tax support in 130 countries. In the U.S. alone, Vertex software addresses indirect taxes for over 13,000 unique taxing jurisdictions.

Vertex institutional ownership data show the buyers clearly have the upper hand. In the past 12 months, 79 large buyers scooped up $184.75 million worth of Vertex shares. During that time, just 31 sellers unloaded $46.19 million worth of Vertex stock.

That’s quite a lopsided equation, and the greater enthusiasm from buyers is reflected in Vertex’s recent returns:

• 1 month: 10.35%
• 3 months: 48.43%
• Year-to-date: 53.55%
• 1 year: 97.34%

When the company reported first-quarter results on May 10, revenue came in higher than expected, as Vertex earnings data show. Earnings of $0.08 a share, on a non-GAAP diluted basis, were flat from the year-earlier quarter. Earnings have been flat for the past three quarters, but double-digit revenue growth got investors’ attention. 

Launched Innovation Lab

Tax software is ripe with innovation, as tax codes are dynamic and increasingly complex. To address those changes, Vertex has a focus on continued innovation. In addition to working closely with customers to develop solutions to specific problems, Vertex has created an innovation lab where it designs, tests, and incubates next-generation tax solutions and additional market opportunities. 

“Over time, we expect such investment will bring additional value to existing customers and help us acquire new customers,” the company says. 

Wall Street Sees Bottom-Line Improvement

Higher expenses for research and development are taking a toll on earnings, but Wall Street is happy with the revenue growth at this point, and expects earnings to improve in fiscal 2024. 

Vertex analyst ratings show that after the most recent quarterly report, three analysts boosted their price targets on the stock.