Why Aspen Technology Inc. Shares Peaked

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Aspen Technology (NASDAQ: AZPN  ) , a developer of software that helps businesses improve and optimize their operations and supply chain management, soared as much as 22% after the company reported better-than-expected third-quarter earnings results.

So what: For the quarter, Aspen Technology delivered an impressive 30.5% increase in revenue to $103.6 million, with subscription and software revenue comprising $91.3 million of that total. Aspen noted that the license portion of its total contract value also rose 13% year over year, to $1.79 billion. Adjusted net income for the quarter more than doubled, to $26.4 million, or $0.28 per share, from $12.9 million, or $0.14 in the prior year period. By comparison, Wall Street was expecting Aspen to report just $0.19 in EPS on $92.8 million in revenue, so it handily crushed estimates. Aspen also announced a $200 million share repurchase program on the heels of its $70 million in free cash flow generated during the third quarter.

Now what: On one hand, it's tough to argue against these results. Aspen handily trounced Wall Street's optimistic forecasts, and has now done so with some level of regularity during the past two years. The need for businesses to improve their operating efficiency is paramount in this uncertain growth environment, which plays into the hands of Aspen. On the flip side, though, Aspen's valuation may already reflect that bullishness, with shares doubling during the past two years, and trading at a frothy 44 times forward earnings and 10 times sales. With that being said, I'd suggest tempering your expectations moving forward, and would likely stick to the sidelines until we get a sizable pullback in Aspen's share price.

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