Simulations Plus: A Health Care Stock with Healthy Growth Prospects
Back in the late 1990's Simulations Plus (NASDAQ:SLP) was a small cap health care software stock trading below $10. Today, it is a $1.2 billion company and an up-and-coming leader in a space that is a ripe for multiyear growth.
Back in the late 1990's Simulations Plus (NASDAQ:SLP) was a small-cap health care software stock trading below $10. Today, it is a $1.2 billion company and an up-and-coming leader in a space that is ripe for multiyear growth.
Simulations Plus is capitalizing on increasing global demand for software solutions that help pharmaceutical and biotech companies develop new treatments and vaccines. This week the company reported fiscal second-quarter results that confirmed the business is as healthy as ever.
What Does Simulations Plus Do?
Simulations Plus provides modeling and simulation software as well as consulting services for a range of customers from drug companies and biotechs to chemical manufacturers and consumer goods companies. Its tools allow the worlds of machine learning and quantitative modeling to connect with fields like new drug discovery, toxicology, and consumer product development.
The company's main business is offering solutions to pharmaceutical companies and regulatory organizations that oversee product development. Its main product is GastroPlus which sounds like an over-the-counter antacid but is actually the company's flagship modeling platform. The software helps life sciences researchers simulate how the human body and animals respond to oral, dermal, ocular, muscular, and other drug application processes. GastroPlus revenue accounted for 57% of overall sales in Q2.
Its other key products are Monolix Suite and ADMET Predictor which together make up about 35% of revenue. Simulations Plus is a California-based company but its distribution network extends well beyond the U.S. Last quarter it stretched its sales network to South American and into other parts of China, a key growth market.
How Did Simulations Plus Do in Fiscal 2021 Q2?
It was a record performance for Simulations Plus in the quarter ended February 28th, 2021. Revenue climbed 27% to $13.1 million and net income rose 49% to $3.2 million, or $0.15 per diluted share. The consensus EPS estimate was $0.14 so it was a small but respectable beat. It was also 25% above EPS posted in the year-prior period. More importantly, the top line growth well outran the company's full-year target of 15% to 20%. Management did say, however, that it expects growth to moderate in the second half of the year.
The business mix is compelling here because revenues come from either software or services, both of which tend to involve longer-term contracts. The software side of the business was the star performer in Q2 which is good news because it accounted for 60% of revenue. Software sales increased 45% year-over-year although this included sales from the recently acquired Lixoft business. Service revenue was up a more modest 7% but Simulations Plus exited the quarter with a healthy $11.2 million services backlog.
As a software-first company, average revenue per customer is a metric that is closely watched by the market. This helps analysts gauge how well the company is generating revenue from its customer base. In Q2 this figure increased from $42 to $66, a significant jump in 12 months' time.
Is it a Good Time to Buy Simulations Plus Stock?
Simulations Plus reached a record intraday peak of $90.92 on February 26th. It has since retreated more than 30% offering investors another chance to buy into a company with plenty of growth ahead.
There's much to like about Simulations Plus including the diversification of its end markets and the growing interest in software-based tools to guide product development. Moreover, its software lineup is expanding which is putting it in a better position for cross-sell opportunities to new and existing customers.
The recurring revenue model commonly associated with software companies is also attractive. This helps it generate steady cash flow, and since margins are notoriously high in this business (a 78% gross margin in the case of Simulations Plus), profits can be used to pursue more valued-added acquisitions which has been a core part of the growth strategy. The balance sheet is strong with minimal long-term debt and the stock also pays a small dividend, uncommon for double-digit growth company.
The technical analysis is also encouraging. Earlier this month a continuation wedge pattern took shape on the daily chart when Simulations Plus was trading in the mid $60's. The bullish intermediate-term pattern suggests the stock could resume its uptrend and head back into the low $90's by June 2021 which would be a nice short-term gain.
So, the fundamentals and technicals both seem to be leaning in the same direction on Simulations Plus. Investors that buy in at current levels may be in for some plus-sized returns.
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