Undervalued by about 15% and surpasses even Oracle in quality

This is exactly the type of company that investors love in good times and hate in bad: an expensive, high-quality software leader with a premium valuation. When everything is going well, investors are willing to pay any price for it. When the first crack appears, it falls twice as fast as the market, because investors are selling off not only the deteriorating outlook but, more importantly, that premium. That’s exactly what has happened to this stock over the past year. From a high of $310, it fell all the way to $148 (today it’s at $170), a drop of more than 40%, despite the fact that the company has beaten revenue estimates for five consecutive quarters and continues to grow by 16% annually. The market has essentially written it off because of a single number, which we’ll examine in detail.

Yet it is one of the highest-quality software businesses on the U.S. stock market. The company has a gross margin of around 75%, an operating margin (on a non-GAAP basis) of around 45%, low debt,…