Red Violet: A Broad Spectrum Of Opportunities On The Horizon

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Red Violet’s stock has sold off recently, even though the underlying business has been performing well.In addition to a 15% growth in revenue, profitability is expected to grow even faster due to its ...

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The business is run by a highly competent management team with a proven track record. There are multiple levers for growth, which should in turn drive significantly higher profits due to its fixed cost structure. Red Violent is underfollowed by investors, and with it trading at 10 times 2024 EBITDA estimates, I believe it is priced too low and therefore rate it a BUY. Business overview What Red Violet does for its customers?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4579":"人工智能","BK4123":"调查和咨询服务","RELX":"Relx PLC","SGXZ23171101.USD":"NIKKO AM SHENTON GLOBAL OPPORTUNITIES (USD) ACC","TRU.AU":"TRUSCREEN GROUP LTD","LU2065732104.USD":"ALLSPRING (LUX) WF GLOBAL SMALL CAP EQUITY \"I\" (USD) ACC","BK7094":"医疗保健技术","TRU":"TransUnion","TRI":"汤森路透","LU1989763005.USD":"东方汇理教育基金A2 Acc","LU1989773731.SGD":"CPR Invest - Education A2 Acc SGD-H","BK4023":"应用软件","TRI.AU":"TRIVARX FPO","BK4018":"居家用品","LU1989764664.SGD":"CPR Invest - Global Disruptive Opportunities A2 Acc SGD-H","SPB":"Spectrum Brands Holdings","BK7007":"医疗保健设备","LU1989764748.USD":"东方汇理环球颠覆性机遇A2 Acc","LU1169590202.USD":"ALLSPRING (LUX)  U.S. SELECT EQUITY \"I\" (USD) ACC","SG9999004303.SGD":"Nikko AM Shenton Global Opportunities SGD","LU1169589451.USD":"ALLSPRING (LUX)  U.S. SELECT EQUITY \"A\" (USD) ACC","RDVT":"Red Violet, Inc."},"translate_title":"红紫罗兰：地平线上的广阔机遇","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TRU.AU":1,"TRU":1,"TRI.AU":1,"TRI":1,"SPB":1,"RELX":1,"RDVT":1},"content_text":"Red Violet’s stock has sold off recently, even though the underlying business has been performing well.In addition to a 15% growth in revenue, profitability is expected to grow even faster due to its fixed cost operating model.With highly competent management at the helm, Red Violet has multiple opportunities ahead of it to succeed.   da-kukAn interesting investment in the application of AI Red Violet (NASDAQ:RDVT) is a data fusion software business which leverages AI for its data analytics to create identity insights and fraud prevention solutions. The business is run by a highly competent management team with a proven track record. There are multiple levers for growth, which should in turn drive significantly higher profits due to its fixed cost structure. Red Violent is underfollowed by investors, and with it trading at 10 times 2024 EBITDA estimates, I believe it is priced too low and therefore rate it a BUY. Business overview What Red Violet does for its customers? Red Violet owns an advanced identity intelligence platform called CORE which ingests data from numerous, diverse data sources, and produces insightful outputs on almost any US individual. The CORE platform is sold to customers under two separate brands, namely IDI and FOREWARN. The IDI product gives its user comprehensive background information on any individual or business. It is typically used for background checks, credit checks and debt collection. Red Violet's FOREWARN product, on the other hand, is an app that is used by real estate agents to run real-time background checks on unknown prospects prior to encountering them. FOREWARN has seen swift adoption by the market and is growing rapidly by now serving more than 400 realtor associations in the US. According to the company's latest investor presentation, the total addressable market for its current products is close to $10 billion and growing at 15% a year until 2026. Business model Red Violet has an attractive fixed cost business model, which means margins can rapidly scale up with rising revenues. The fixed costs mainly pertains to the costs that Red Violet must pay its suppliers that provide it with a vast amount of data. Once the data has been acquired for an agreed sum and ingested into its CORE platform, Red Violet can then use it across multiple users and products for the same cost. Management team The management team is highly experienced and well-incentivized with high insider ownership. CEO Derek Dubner has a proven track record of building and scaling similar data fusion businesses, together with some of the members of the current management team, as explained by Seeking Alpha author VG capital in more detail in this article. My estimates for revenue growth and profit margins Red Violet has shown steady growth over the past few years, with healthy margins that have trended higher each year as they leverage their fixed cost model. IDI is Red Violet's main product, costing around $6000/year per user and contributes majority of the company's revenue. The FOREWARN product is smaller but growing at a much faster rates as it is becoming the de facto solution for real estate agents. This product is priced at much lower rates, ranging from $240/year for individuals and around $50/year per agent when negotiated as a part of contracts with large realtor associations. The prices of the IDI product and the FORWARN product sold through contracts with large Realtor associations are not publicly disclosed due to its sensitivity, and therefore the numbers mentioned above are my estimates based on the revenue contribution from each product and its total number of users based on Red Violet's current and previous year financial numbers. Red Violet has had significant new business wins recently from large realtor associations such as Florida Realtors for over 238,000 users which should contribute towards strong revenue growth this year.   Company data and my estimates Red Violet's management team does not provide any quarterly or full-year guidance. The only guidance they have provided investors with was the three-year guidance given in their Q4 2021 earnings release, which called for revenue and EBITDA margins of $100 million and 40% respectively in 2024. Reaching these targets this year, however, seems unrealistic, and therefore my estimates call for revenue and EBITDA of $71 million and $21.3 million for this year. My estimates are slightly more bullish than current Analyst estimates as I believe in an increased impact from recent business wins and the potential for new ones this year. Valuation analysis Relative valuation compared to peers Based on my estimates, Red Violet trades at 10 times and less than 8 times EV/EBITDA for this year and next year respectively. At this valuation, Red Violet is cheap compared to more mature peers such as RELX Group (RELX), TransUnion (TRU) and Thomson Reuters (TRI) which trade at forward EV/EBITDA ratios of 18.3, 13.2 and 25 respectively. Moreover, Seisent, a data fusion business that CEO Derek Dubner was previously associated with, was sold to LexisNexis for $775 million in 2004 at an EBITDA multiple of 17.   Valuation sensitivity analysis based on my estimates The table above shows a valuation sensitivity analysis ranging from an EV/EBITDA multiple of 10, where it trades today, to 18. Even though Red Violet is growing much faster than its peers, it does warrant a lower valuation due to its smaller size and relatively shorter history. Assuming a multiple of 14 which is at the midpoint of the range, it implies a share price of $24.8 and $29.6 for Red Violet in 2024 and 2025. This represents significant upside of at least 40% from today's share price. Strong free cash flow conversion If investors prefer to use Free cash flow as a metric to value the business, Red Violet still screens well due to the high free cash flow conversion in its operating model. The significant cost which needs to be considered when estimating FCF from EBITDA is the cash spent on investments. This mostly relates to software development costs. The excerpt below, taken from the 2023 Annual report shows that Red Violet spends around $9 million a year on investments. Subtracting this from their EBITDA figure, gives the resulting free cash flow generated by the business. 2023 Annual ReportOpportunities for share price appreciation going forward Further growth from current products Red Violet has shown strong growth recently by increasing the number of users on its platform. For the IDI product, Collections related revenue is a large component, and this is expected to grow faster going forward as credit quality deteriorates in this high-interest rate environment. FOREWARN has landed large wins recently and still has ample room for growth in its target market of up to 1.5 million realtors. Both these products have high net retention rates of between 92 and 95%. Growth from new complementary products As mentioned during the Q4 2023 earnings call, management has a pipeline of new products based out of their CORE platform. They now aim to reach verticals in the public sector such as law enforcement by helping them track and monitor criminals. They also have a customer profiling and customer acquisition product for the marketing sector. These could be new revenue streams for the business. Share repurchases As Red Violet leverages its fixed cost business model, it becomes increasing profitable and cash generative from every incremental dollar in revenue. When it comes to allocating its excess cash, management had in May 2022 authorized a share repurchase program for $5 million and this was recently increased by another $5 million in December 2023. At these prices, I believe that share repurchases are immensely value accretive. Acquisition target By having an industry-leading product platform for data insights and analytics, Red Violet becomes an attractive acquisition target, especially at its small size and appealing valuation. Added to that, its management has a history of selling their businesses to larger players in the market when they think the offer is acceptable. Risks to consider Dependence on single supplier for data Red Violet is heavily dependent on its suppliers for providing them with user data. As per its 2023 Annual report, its major supplier accounted for 48% of the company's data acquisition costs in 2023. The contract with this supplier runs until 2026. Failure in renewing such a significant contract could hamper Red Violet's product offering in the future. Additionally, new privacy laws on collecting user data, may lead to less data being available for Red Violet to use. Rapidly rising sales and marketing expenses   Figures taken from Investor presentation As shown in the table above, since 2021 sales and marketing expenses have seen a sharp rise which has even outpaced revenue growth. Investors should closely watch this going forward to ensure that Red Violet is not having to over spend to achieve their revenue growth targets. Competition in the market Red Violet is a small player in the Data and Risk Analytics market which has much larger players such as RELX Group, TransUnion and Thomson Reuters. Though they compete on similar products, I believe the serviceable market is very large, and Red Violet can be a winner even in a small segment of that. This is still a significant risk that Red Violet has to deal with. Key Aspects to look out for in its Q1 earnings next week  Successful onboarding from their recent Realtor wins should show a sharp rise to nearly 0.5 million users of FOREWARN. EBITDA margins should continue to trend above 30% as it further leverages its fixed cost model. Investors should look out for the timeline for when Red Violet's new products could contribute to its topline.  Final thoughts  Red Violet is a significant player in its market and has shown strong revenue growth over the recent years with sharply increasing profit margins. Even though there are some risks associated with it, it is my view that there are many opportunities that could propel Red Violet shares much higher in the near future. At today's attractive valuation, I believe investors are presented with a good risk reward to go long this name.","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/2432781985"}