Alkami Technology: Potential Revenue Uplift From Reduced Sales Cycle

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Alkami Technology is a US-based fintech company providing digital banking solutions for banks and credit unions.ALKT stock performance has been lackluster since going public in 2021, but it has made a...

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These FIs are often smaller than the top-tier nationwide or multinational FIs in terms of AUM and are also often under-digitalized from operational standpoint, because of their reliance on physical locations often scattered outside metropolitan areas. As such, despite the continued strong demand for digital banking, I could see how serving these underserved segments could be costly for leading enterprise digital banking providers like Temenos or FIS. In the meantime, there appears to be a solid business opportunity in serving this segment, which is made up of over 2,500 FIs today. Therefore, I believe ALKT's focus on the underserved FIs since day one provides it with a competitive advantage that is hard to copy. Since going public in 2021 at a price of $42, all-time share performance has been lackluster. Today, ALKT trades at $23 per share, having lost over -44% of its value since 2021, even though ALKT has made a significant rebound over the past year. The 1-year return stands at over 87%, while the same time last year, ALKT was still trading at $12. However, ALKT has been trading sideways YTD, with the stock remaining at low-to-mid twenties so far. I initiate my coverage with a buy rating. My 1-year price target of $26.6 presents around 14% upside from the current trading price of $23. Financial Reviews YCharts Fundamentals are relatively below average, though improving as of late. Revenue has seen steady double-digit growth, though annual top-line growth has declined from over 50% YoY at the time of IPO to 29% YoY in FY 2023. The decline in revenue growth has been offset by improvements in net profitability and also operating cash flows (OCF). Though ALKT still burned through over -$17 million of OCF in FY 2023, it is still a better performance compared to past few years, when OCF burn was hovering beyond -$30 million annually. Likewise, net loss margin was -23% in FY 2023, suggesting a relatively big gap to breakeven, though already seeing gradual improvements. The lack of profitability and cash flow generation has impacted ALKT's liquidity. Having raised $180 million in its IPO in 2021, ALKT ended the year with over $300 million of liquidity. However, it would then continue to decline. In the most recent FY, FY 2023, ALKT ended the year with just over $92 million of liquidity. Catalyst Into FY 2024, there seems to be a continued strong tailwind for digital banking solutions across the US. ALKT will therefore stand to benefit from the secular trend, in my opinion. As per my earlier point, the secular trend remains consistent across all segments, including the ones ALKT is serving. grand view research As reported by Grand View Research, digital banking platform is expected to be a $20 billion market in the US alone by 2030, driven by the increasing consumer demand for digital experience. While the figure appears small compared to the projected $100 billion TAM globally, I believe the 20% expected CAGR makes it an attractive market. Moreover, assuming an estimated $7 billion TAM today, ALKT's $264 million revenue still points to just under 4% market penetration. This means that there is a lot of room for more upside. Moreover, ALKT's focus on community and regional FIs should also provide the company with sufficient differentiation that allows it to maintain a competitive position in its niche market. Another potential catalyst that may help ALKT maintain revenue growth in FY 2024 is the recent initiative to strengthen its technology capabilities across the organization and also post-sales implementation. I believe that stronger technology capabilities will enable ALKT to reduce integration risks and also implementation time, effectively driving more successful clients' onboarding and eventual revenue generation. In the Q4 earnings call, the management indicated that ALKT has hired new executive team members to focus on engineering and client experience. I believe this is a sensible decision, especially considering the strong, yet busy pipeline for FY 2024: And we added executive talent in two important areas of our business: engineering and client experience, which includes all post-sales activities. Number three, maintain excellence in launching new clients. Each year, as we grow, we continue to ramp up the number of new clients we launch. It's one thing to launch a few clients a year, but Alkami plans to launch 40 new clients in 2024. We believe that the ability to successfully launch clients is a sustainable competitive advantage for Alkami. And during 2024, we intend to build upon our strengths in this area while improving productivity. Source: Q4 earnings call. Risk I believe a major risk to my thesis, which hinges on both product adoption and also a shorter sales cycle, would be the growing trend of M&As within the credit union industry. Though ALKT does not break down its clients by FI segments, what we have understood so far is that credit unions may make up quite a sizable portion of the business. As the management commented in the Q4 earnings call when asked about the reason for non-renewal activities, M&A within its clients' industry could be a double-edged sword: The third one is the result of the financial institution being acquired. Generally, for Alkami, we've been the beneficiaries of mergers and acquisitions of financial institutions. But in this case, we are not the acquirer; our financial institution, that's our client, is not the acquirer, and they're moving to the digital banking platform of the acquiring financial institution. Source: Q4 earnings call. On one hand, if the acquirer is already using ALKT's offering, then there is a high possibility that the target company will then move to ALKT's platform, if it were not already under contract with ALKT. This would definitely result in customer expansion. However, on the other hand, acquisitions of ALKT's relatively smaller clients by larger megabanks or FIs that are already using competing solutions will potentially result in client churns. cutimes In my opinion, though, the risk of churning could be even higher than anticipated, due to ALKT's focus on relatively smaller FIs, like credit unions. The FI M&A trends remain strong today, with the number of credit unions continuing to decline despite healthy growth in memberships, suggesting increasing concentration of members within few, larger credit unions or FIs. For investors interested in ALKT, I would advise to monitor these trends ahead of investing. Valuation/Pricing My target price for ALKT is driven by the following assumptions for the bull vs bear scenarios of the FY 2024 projection:  Bull scenario (60% probability) assumptions - I expect ALKT to achieve an FY 2024 revenue of $332.6 million, a 25.6% growth, in line with the market's estimate. I conservatively assume a forward P/S to stay at 8.4x, where it is trading today, though it will effectively drive share price appreciation to $29. Bear scenario (40% probability) assumptions - ALKT to deliver FY 2024 revenue of $320 million, conservatively lower than the market's low end estimate of $328 million. In this scenario, I assign ALKT a forward P/S of 7, which implies sideways price action around $23 price level.  own analysis Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $26.6 per share, projecting a potential upside of just under 14%. I would rate the stock a buy. Overall, my projection is relatively conservative despite the 60-40 bull-bear weighted probability that leans towards a bullish scenario. The probability assignment is driven by my belief that there is a tangible value in improving the sales and tech implementation cycle, especially for under-digitalized clients, though it may take a bit of time before ALKT can realize the full potential of its tech investments in 2024. Meanwhile, my conservative projection is manifested in the assumptions of lowered bear-case revenue estimate and same bull-case multiple as today. I also assumed a 3% increase in average shares outstanding, similar to the level of increase in FY 2023. Conclusion  ALKT is a fintech company providing digital solutions for smaller FIs. Over the years, it has also built competitiveness and a track record in that niche market. Considering the growing trends in digital banking platforms, I expect stronger product adoptions ahead for ALKT. ALKT will also invest more in its technology capabilities, potentially resulting in reduced legacy integration, implementation, and sales cycle, driving revenue growth. However, the uptick in FI M&A trends may increase client churn risk. My conservative 1-year price target of $26.6 projects around a 14% upside. I rate the stock a buy.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2425539956"}