Tyler Technologies (TYL)

By both methods, the value today (DCF $252 · Multiples $283) is below the market price ($340).

Today — expensive, no margin of safety: at $340 trades ~20.0% above its value discounted to today (~$283); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($353) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$176.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($340) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (14.9%/year) above our base case (8.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$0.7 bn of owner earnings in year 5 (vs ~$0.5 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EV/NOPAT (NOPAT = EBIT × (1 − tasa efectiva)). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 = TTM to 30-Jun-2026 (revenue US$2,429.657M). The year-1 path starts from the guidance reaffirmed in the release of 29-Jul-2026 (revenue US$2,535-2,575bn for fiscal 2026, midpoint +9.5% versus FY2025), in line with the trajectory of the last three fiscal years (+5.5%/+9.5%/+9.1%) — there is no under-start or artificial jump. From there growth decelerates smoothly toward +6.8% by year 5 in the base case, consistent with mature quality software (a stable switching-cost moat, customer churn ~2%) that is still penetrating the on-premise-to-SaaS migration but is no longer hypergrowth (Rule of 40 ≈ 35, not ≥40). The year-0 GAAP operating margin (15.14%) first compresses in year 1 (14.4%) on the declared acceleration in research and development spending (+73% year over year in 2025, headcount +57.5%) and then expands toward 19.5% by year 5 as that investment matures and the subscription mix keeps growing — a declared trough and recovery, not a monotonic path, because the filing itself documents the cause (§5 R1). It is valued on EV/NOPAT: stock-based compensation is already expensed within GAAP operating income (broken out line by line in the release's non-GAAP reconciliation), so reported EBIT already nets it, and it is material against free cash flow (21.9% of TTM FCF, only 6.4% of revenue — the TSLA case in the methodology), so a gross flow metric cannot be used without correcting it. Capex is minimal against depreciation and amortization (US$16.5M TTM versus US$144.2M, dominated by the amortization of acquired intangibles) → treated 100% as maintenance (maintPct: 1). The balance sheet went from net cash to net debt in May 2026: Tyler issued US$1.4 billion of 0.50% convertible notes (maturing 2031) to fund the acquisition of For The Record (US$213M) and an aggressive buyback (5.6% of shares outstanding so far in 2026, a new US$1.5 billion authorization on 24-Jul-2026); the June 2026 balance sheet (10-Q/8-K, more recent than the FY2025 10-K used for other fields in the facts pack) shows cash+current investments of US$970.0M and debt of US$1,408.7M — corrected here because the facts pack carried the December 2025 debt (US$599.7M, already repaid). Buybacks are modeled with an explicit share path (sharesPath) that decelerates from the current pace —partly funded with the convertible issuance, not sustainable at the same rate (§6, adjustment 2)— toward a pace fundable with TTM free cash flow (US$714.3M). The base exit multiple (17×) sits within the range for mature quality software (14×-20×), in the middle position: terminal growth (+6.8%), a wide, stable moat and a return on invested capital of ~11.2% (above the 10% bar, though moderate for the category because invested capital carries the goodwill accumulated over years of acquisitions —goodwill US$2.75bn, almost half of total assets—, the pattern of a serial acquirer, the BSX/DHR rule: the numerator grows, the denominator drags the price paid) support the middle position without reaching the top of the range, which is reserved for a clearly exceptional return on capital. The result comes in below the market price even after the stock's decline: the current entry multiple is still far above the disciplined range.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $353 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $340, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $353 in 5 years and a required return of 4.5% annually, the maximum to pay today is $283. Against the current market price ($340), the margin of safety is -20.0% (trades above the maximum → a premium is paid) and the total return at that price would be 0.8% annually.

• Multiple vs quality. 40× NOPAT today, above the reference range of 14×-20× for mature quality software, even after the stock's decline.
• Reverse-DCF. Market price demands sustained growth above the favorable scenario to justify itself at the 10% bar.
• Margin of safety. Total return +1% below the 4% floor of the method → negative margin of safety.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (116%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC exceeds cost of capital. Return on invested capital ~11.2%, above the 10% bar but moderate for the category — invested capital carries the goodwill from years of acquisitions.
• Margin and stability. GAAP operating margin 15.1% (TTM), compressed short-term by the acceleration in R&D spending; non-GAAP margin (~26%) shows underlying profitability before amortization of acquired intangibles and stock-based compensation.
• Quality of cash. Free cash flow TTM US$714 million (29.4% of revenue), with a record cash generation in Q2 2026 (+34.7% year-over-year); stock-based compensation is material relative to cash flow (21.9%) and expenses in the valuation metric.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

ARR (annualized recurring revenue) is the leading indicator of the business: grew 11% in 2025 and 8.2% year-over-year in Q2 2026, in line with reported revenue. The engine is the migration of on-premise customers to SaaS (488 conversions and 612 new SaaS customers in 2025) plus customer churn of just ~2% annually, not volume × price as in a transactional business.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. Growth is organic, driven by SaaS migration and small bolt-on acquisitions; does not depend on inflation or FX (100% domestic business).
• Growth engine. Migration of on-premise customers to SaaS (488 conversions in 2025, 612 new SaaS customers) and expansion of annualized recurring revenue (+11% in 2025).
• Deceleration and cycle. Revenue growth slowed from +9.5% (2024) to +8.2% (TTM) following the loss of a large Texas contract; reaffirmed 2026 guidance (+9.5% at midpoint) suggests the deceleration has stabilized.

• Relevant in 10 years (recurrence). Mission-critical systems for governments (justice, taxation, public safety) with near-automatic renewal; 87% recurring revenue.
• Pricing power. Subscription contracts renew at rising prices and customer churn is just ~2%; pricing power is high within the installed base.
• Moat and direction. Wide moat (switching costs + scale) and stable: 22 consecutive quarters with SaaS subscription growth of at least 20%.
• Capital cycle. Software for the public sector is fragmented and consolidating via acquisition (Tyler, Oracle, CentralSquare); Tyler's R&D spending accelerated to defend position against new AI-driven entrants.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.8x
• ✓Interest coverage (EBIT / interest)52.6x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 116% of ROIC
• !Value creation (ROIC − 10% bar)+1pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.1x — no over-investment
• !Float / working capitalConsumes cash $0.1 bn (positive WC)
• !Dilution (SBC % of revenue + shares)SBC 6.4% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Balance shifted from net cash to net debt in May 2026 with the issuance of US$1.4 billion in convertible notes at 0.50% maturing 2031.
• Coverage and cash. Over US$1 billion in cash and investments, with positive net interest income guided (US$19-21 million for 2026) — leverage is manageable for the business's cash flow.
• Pending litigation. Ongoing litigation since 2022 over contract termination by a state, unresolved after mediation in December 2025; outcome and possible contractual penalties remain uncertain.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Insider ownership data not disaggregated in the available proxy extract; the largest identified shareholders are institutional (Vanguard, BlackRock).
• Capital allocation. Buyback as priority (5.6% of shares outstanding in 2026, new US$1.5 billion authorization) plus bolt-on acquisitions; no dividend. Recent buyback partially financed with convertible debt, not only operating cash.
• Integrity / normalization. The company clearly distinguishes GAAP and non-GAAP results in each disclosure, and explicitly stated the impact of the lost Texas contract in guidance.

• The stock's decline reflects real information, not unjustified panic: a weak Q4 2025 result, soft initial guidance and the loss of a Texas payments contract for US$36 million (motivated seller: the market punished missing consensus).
• Even after the decline, entry multiple (40×) remains above the reference range for mature quality software (14×-20× EV/NOPAT) — the stock appears cheap due to the magnitude of the fall, but in absolute terms it is not yet.
• No clear additional discount source (no spin-off, no analyst coverage gap, no cycle bottom): price already reflects the known deceleration.

Without a multiple within range or an identifiable additional discount source, total return (+1%) does not reach the method's floor — the business quality is real, but the price does not yet reflect it with margin of safety.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -14%/year (-52% total): the margin of safety protects the downside. The bull (+7%/year, +43% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• R&D investment execution. Spending accelerated 73% year-over-year (headcount +57.5%); if it does not translate to subscription growth, operating margin stays permanently compressed.
• Entry multiple. 40× NOPAT today remains above the reference range for mature quality software — multiple compression if growth disappoints.
• Public-sector budgets. Contracts subject to government budget constraints and long, unpredictable procurement cycles; already cost a payments contract in Texas for US$36 million.
• Convertible debt and dilution. US$1.4 billion in convertible notes at 0.50% (maturity 2031) can dilute shareholders if stock exceeds the effective conversion price (US$655.77).

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 11% above the 10% bar, but the price sits above value (no margin) → great business, expensive.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 8% at a multiple/growth of 5.0 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 3% (EBIT/EV) + ROIC 11% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 15% vs our 8%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -14%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, efficient scale, cost advantage, switching costs → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 15% growth, far above our 8% — heroic assumptions.