Wed. Dec 7th, 2022

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We Are

In spring of this year, I last had a look at shares of Alkami (NASDAQ:ALKT) as I concluded that there was no alchemy to be found. The company has been struggling since its IPO, seeing slower growth and lack of operating leverage.

This dreadful situation has hurt shares as the decline in the shares has not yet created a convincing argument to initiate a position, certainly not as net cash balances have been depleted in a major way following a bolt-on deal announced in March, with continued losses being posted ever since.

Some Background

Founded in 2009, Alkami provides cloud-based digital banking solutions for financial institutions. The goal of these services is to allow clients to serve customers in a more efficient and effective manner, while delivering on greater customer service, with the same customers reaching out to the bank in multiple ways nowadays.

The company specifically focuses on smaller banks, often regional and community banks, as they have been lagging their larger peers in terms of technological adoption. It is not just customer demand which is driving the need for these solutions: regulatory and safety concerns are a major driver for the adoption of technology as well.

Shares traded in the $40s in April 2021 as a more than $2 billion valuation was demanding, being applied to a business which generated $73 million in sales in 2019 on which operating losses were reported at $42 million. While revenues rose 52% to $112 million in 2020, operating losses narrowed just slightly to $35 million.

With shares trading around the $30 mark soon after the public offering, I failed to see appeal as shares have gradually fallen to $15 per share amidst a pullback in technology and recent IPO names. In February of this year, the company posted a $152 million revenue number for 2021, with EBITDA losses seen around $22 million and net losses reported at $47 million. The company guided for $190 million in sales in 2022, which looks quite solid, yet adjusted EBITDA losses were still seen between $18 and $21 million. This marks no progress on the margin front.

When I looked at the shares at $15 in March, the company commanded a $1.3 billion equity valuation, for an enterprise valuation of just over a billion. The 5-6 times sales multiple looks reasonable, yet earnings are non-existing, as actually the company is posting substantial losses. The company announced a $136 million bolt-on deal for Segmint in March and with a $14 million revenue contribution run rate, valuations are quite demanding, as the deal will deplete a substantial part of the net cash balances of the company.

The move lower has reduced the sales multiples a great deal, but the lack of earnings (or substantial losses) made valuations hard. Appeal was certainly improving, not be confused with the expectation that appeal was seen already.

Consolidating

Since my cautious but more constructive stance in March this year, shares have been trading flattish in an $11-$15 trading range, currently trading towards the higher end of that range. Little news has happened on the corporate front other than the release of two quarterly earnings releases.

After Alkami posted 35% revenue growth for all of 2021, the company maintained this pace of growth in the first quarter of 2022. First quarter sales came in just below the $45 million mark as EBITDA losses narrowed from just over $6 million to $3 million and change. That is part of the picture as GAAP losses increased from nearly $11 million to more than $13 million.

The company raised the full year sales guidance to $198-$201 million, including a $9 million revenue contribution from Segmint, as otherwise, the outlook is pretty stable. EBITDA losses are seen stable at $18-$21 million, including a million negative contribution from Segmint.

Second quarter sales growth accelerated to 38% with revenues topping $50 million, with the small increase in the pace of growth driven by the Segmint deal, with EBITDA flattish around a $5 million loss, as net losses increased to $20 million. With full year revenues now seen between $201 and $203.5 million and EBITDA losses seen between $18 and $20 million, a very modest hike is a very welcoming factor at a time when many peers have had to cut their guidance.

What Now?

Net cash balances have fallen to $128 million following the Segmint deal as the 91 million shares now value quality of the business at $1.27 billion here, for a $1.14 billion enterprise valuation. This still comes down to 5-6 times sales and while EBITDA numbers are improving a bit, losses are still significant, although cash holdings are sufficient to fund these losses for quite some time, in combination with more moderate cash outflows with a substantial portion of losses resulting from stock-based compensation expenses.

Yet it becomes time for the business to show better margins as the pace of operating leverage is painstakingly slow here, and with many peers in the technology sector having sold off further since the spring of this year, I do not see a convincing argument to alter my cautious to neutral stance.



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