Cloud solutions provider rhipe (ASX:RHP) has delivered significant value to shareholders in the past three years, generating a more than 4-fold return. More recently, though, shares have dropped around 28% below their August high with a relatively flat full year outlook weighing on market sentiment.

With shares previously trading on a price to earnings ratio of over 50, it is perhaps not unreasonable to expect a pull back. But with the company seemingly well positioned to capture the ongoing growth in cloud services, could this be a buying opportunity for long-term investors?

Since 2015, rhipe has grown revenues by an average annual compound rate of 24%, transitioning from a loss making operation to one that last year generated $12.8 million in operating profit. Last year alone, group revenue and operating profits increased 36% and 65%, respectively.

Source: 2019 Annual Report

The company has zero debt, with $25 million in cash on hand. Moreover, it’s managed to execute its recent growth with no material increase in the share count and prudent cost management.

More recently, however, rhipe saw quarterly operating costs increase to $9 million, up from $7 million a year ago. The business also entered into a joint venture in Japan, which is expected to provide a $3 million drag on profits in FY20.

The Japanese market is however a significant opportunity, one that is 5 times larger than the Australian market and that is forecast to grow at 25% per annum over the next few years. This joint venture is with a well established local incumbent that has won the Japan Microsoft Partner of the year six years running.

At the recent Annual General Meeting (AGM), rhipe told investors that it expected $13 million in operating profit for the current financial year — barely 1.5% above FY19’s result. This has been dampened by growth investments and the establishment costs of the joint venture but, if management execute well, it could be a case of short term pain for long term gain.

Stripping out the JV costs, operating profit would likely come in at $16 million for FY20, a 25% improvement on the previous year. And as revealed by the recent quarterly update — where group revenue grew 25% on the previous corresponding period — the underlying business continues to perform well.

Of course, there’s a significant counter-party risk in rhipe’s concentration to Microsoft, it’s a competitive and fast evolving industry and (despite the recent pull back) shares still sit at a lofty forward P/E multiple of 48. Even if the company performs well, it will likely be at least FY2021 before that’s really evidenced by the financials.

Ranked #57 on Strawman, rhipe presently sits below the community consensus valuation. Click below to learn more.

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