TipRanks Smart Growth Newsletter #9: Banking on Breakthroughs
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Dear Investors,
Welcome to the ninth edition of our brand new TipRanks Smart Growth Newsletter.
Through the Smart Growth Newsletter, we aim to provide you with high-potential investment insights to support your growth strategy. Each week, our analysts will identify cutting-edge companies positioned to capture market share and deliver exceptional growth, giving you unique insights in a dynamic investing landscape.
Stocks we recommend have been carefully analyzed and vetted, using TipRanks data, ensuring you receive well-researched, high-potential opportunities aimed at delivering substantial, long-term growth. We will present you with a comprehensive analysis that outlines our selection process, giving you clear insights into why each stock stands out as a top growth opportunity.
With that in mind, let’s dive into this week’s top pick and explore why it could be a valuable addition to your Growth portfolio.
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This Week’s Top Growth Pick: Alkami Technology (ALKT)
Alkami Technology, Inc. is a leading provider of cloud-based digital banking solutions tailored for financial institutions. The company’s platform integrates advanced user experience design, data analytics, and robust security features to deliver seamless and personalized banking experiences. Alkami’s solutions empower banks and credit unions to enhance customer engagement, streamline operations, and drive digital transformation. The platform supports a wide range of services, including account management, payments, and financial wellness tools, enabling institutions to compete effectively in an evolving financial landscape. Alkami serves a diverse client base across the United States, addressing the growing demand for innovative and secure digital banking solutions.
Source: Alkami Technology, Inc. Q3 2024 Investor Presentation
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Here’s Why ALKT’s Stock Is Likely to Grow:
❖ Positioned in a Growing Market: Increasing adoption of digital banking and fintech innovation creates strong demand for Alkami’s solutions, solidifying its growth trajectory and market relevance.
❖ Market Leadership in Vertical SaaS: Alkami is a leading provider of specialized digital banking solutions for U.S. community banks and credit unions, a growing and underserved market segment.
❖ Robust Revenue Growth: The company has delivered consistent double-digit revenue increases, reflecting strong user adoption, zero client churn, and expanding ARR.
❖ Expanding Backlog: A substantial RPO highlights long-term revenue visibility and ongoing client commitments, ensuring predictable cash flows.
❖ Financial Momentum: Alkami is making significant progress toward profitability, with improving gross margins, rising EBITDA, and a debt-free balance sheet that enhances its financial stability.
❖ Analyst Support and Valuation Upside: With multiple price target upgrades and a consensus “Strong Buy” rating, analysts project meaningful stock appreciation, supported by cash flow projections indicating undervaluation.
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Byte-Sized Banking Breakthroughs
Headquartered in Plano, Texas, Alkami Technology was founded in 2009 to revolutionize digital banking for financial institutions. The company’s early focus on user-centric design and robust technology positioned it as a leader in the rapidly evolving digital banking space.
A significant milestone in ALKT’s growth was securing substantial venture capital funding to support platform development and market expansion. By 2021, the company had raised over $385 million, enabling it to enhance its product offerings and expand its client base. Alkami’s successful IPO in April 2021 on the Nasdaq Stock Market further bolstered its financial position, providing resources for continued innovation and growth.
Alkami has made significant investments in infrastructure to scale operations efficiently. The company has continuously enhanced its platform to meet the evolving needs of its clients, focusing on cutting-edge features like data analytics, machine learning, and enhanced security protocols through strategic partnerships with leading technology providers.
Acquisitions have also played a vital role in ALKT’s growth. The 2020 acquisition of ACH Alert added advanced fraud prevention capabilities, while the 2021 acquisition of MK Decision enhanced its digital account opening and loan origination solutions. In 2022, the company acquired Segmint, a leader in financial data analytics, to deliver deeper insights and personalized experiences. These acquisitions have strengthened Alkami’s platform and solidified its position as a comprehensive digital banking solutions provider.
Source: Alkami Technology, Inc. Q3 2024 Investor Presentation
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Banking on User-Friendly Innovation
The Alkami Platform is a cloud-based suite of digital banking solutions, including online, mobile, and business banking, designed to help small and medium-sized financial institutions (Fis) navigate the path to digitalization. By integrating cutting-edge technologies such as AI-driven analytics, advanced data security measures, and user-friendly design, the platform delivers seamless digital banking experiences that align with modern consumer expectations.
Alkami’s platform supports personalized banking through advanced data tagging and financial insights. Leveraging machine learning (ML), it empowers banks and credit unions to offer targeted recommendations, predictive insights, and real-time fraud prevention. This data-driven approach enhances operational efficiency, boosts customer engagement, and fosters loyalty.
Primarily catering to community and regional banks and credit unions, Alkami’s platform addresses the resource constraints that often prevent these institutions from developing their own digital banking systems. Its customizable, scalable, and user-friendly solutions enable these smaller players to compete effectively with larger banks, delivering high-quality digital services to their customers.
Alkami has forged strategic partnerships with FIs and technology providers to enhance its offerings and ensure seamless integration with third-party applications. These collaborations not only improve customer experiences but also expand the company’s market reach, positioning it well to capitalize on the substantial and growing total addressable market (TAM) for digital banking solutions.
ALKT’s TAM, estimated at $14 billion, includes 250 million digital users across FIs with assets between $100 million and $450 billion. This segment is growing at 5-8% annually, driven by increasing adoption of digital tools, rising account ownership, and demographic trends like a decline in underbanked populations and shifts in consumer behavior.
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Skyrocketing SaaS
Alkami Technology operates on a Software-as-a-Service (SaaS) model, generating revenue primarily through subscription fees for cloud-based access to its platform. Over 95% of the company’s revenue is recurring, providing a predictable and consistent income stream. A smaller portion of revenue comes from transaction fees, customization, and support services, adding incremental value to its offerings.
The stability of Alkami’s revenue is further supported by its long-term subscription contracts, typically spanning multiple years. This aligns with industry preferences, as financial institutions seek scalable and reliable digital banking solutions that minimize operational disruptions. These multi-year agreements also promote strong client retention and underpin Alkami’s SaaS-driven growth strategy.
The company is well-positioned to capitalize on the growing demand for digital banking solutions, particularly among community financial institutions. As consumer adoption of digital banking accelerates, Alkami’s platform is expected to remain in high demand.
In Q3 2024, ALKT reported 19.5 million registered users, a 15% year-over-year increase, driven by new client acquisitions and zero client churn, as well as a 24% rise in annual recurring revenue (ARR). Additionally, the company’s remaining performance obligation (RPO) – a crucial metric for subscription-based businesses – grew by 30% year-over-year, reflecting expanding client commitments, successful upselling, and renewals of multi-year agreements. This high RPO underscores Alkami’s robust pipeline of future revenue, ensuring long-term income predictability and stability.
Source: Alkami Technology, Inc. Q3 2024 Investor Presentation
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The Climb to Profitability
Alkami has demonstrated robust revenue growth, achieving a ~30% CAGR over the past three years. In Q3 2024, revenues rose 27% year-over-year, surpassing analyst expectations for the 8th consecutive quarter. Analysts project that annual revenue growth will moderate slightly to 25-26% in the coming years as the company continues to scale its operations.
The company’s long-term financial targets include a 65% non-GAAP gross margin and a 20% adjusted EBITDA margin by 2026. Significant progress was evident in Q3 2024, with gross margin climbing to 62.8%, up from 58.7% in Q3 2023, driven by operational scaling, higher ARPU (average revenue per user), and cost discipline. Adjusted EBITDA reached $8.3 million (9.7% margin), a dramatic improvement from $0.8 million in Q3 2023.
ALKT has steadily reduced its GAAP net losses, reporting a Q3 2024 loss of $9.4 million, compared to $15.5 million a year earlier. Analysts estimate that the full-year 2024 net loss will decline by over 30% from 2023. Non-GAAP EPS has also consistently improved, transitioning from -$0.06 in Q3 2022 to $0.09 in Q3 2024, reflecting enhanced operational efficiency and revenue growth.
Strengthening Alkami’s financial position is its debt-free status, achieved through exclusive reliance on equity financing. With over $422 million in total assets and $338.5 million in shareholder equity, the company’s strong balance sheet – a rarity among growth companies – minimizes risks associated with debt servicing. This financial stability, combined with expanding ARR, improving margins, and disciplined cost management, positions Alkami to achieve sustained growth and advance toward GAAP profitability.
Source: Alkami Technology, Inc. Q3 2024 Investor Presentation
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Riding the Fintech Wave
Alkami’s stock has risen by approximately 44% over the past 12 months, demonstrating strong momentum despite a recent ~15% decline from its November high, attributed to general market anxiety over the past two months. However, the stock has shown signs of recovery in recent days, as analysts anticipate another strong performance in the Q4 2024 earnings report, scheduled for February 20, 2025.
Citi analysts recently expressed optimism about the fintech sector, predicting it will enter a “dynamic new phase” in 2025. With market sentiment improving, growth companies are regaining investor attention, especially those with robust fundamentals and analyst support. In this context, Alkami stands out, having received multiple price-target upgrades from leading Wall Street analysts. The consensus rating is a “Strong Buy,” with an average price target suggesting a ~24% upside.
For instance, JPMorgan noted that vertical software-as-a-service companies like Alkami are continuing to gain market share from “outdated homegrown solutions and horizontal SaaS competitors.” They also emphasized that the premium valuation for vertical SaaS firms is justified by their sustainable revenue and earnings growth potential.
While Alkami trades at a premium compared to industry peers, this valuation appears warranted given its strong growth trajectory, improving profitability, solid financial health, and strategic positioning in the fintech market. Moreover, future cash flow projections suggest that ALKT is undervalued by approximately 25%, highlighting its attractiveness as a long-term investment.
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To Sum It All Up
Alkami Technology is a leading provider of cloud-based digital banking solutions, catering to U.S. community banks and credit unions. The company has delivered robust revenue growth in recent years, supported by strong user expansion, exceptional client retention, and increasing recurring revenue. ALKT benefits from a debt-free balance sheet and a substantial backlog of contracted revenue, showcasing its financial stability and long-term visibility. While the stock trades at a premium to peers, this valuation reflects Alkami’s strong growth potential, a clear path to profitability, and strategic leadership in the vertical SaaS fintech sector. With positive analyst sentiment and future cash flow projections indicating the stock’s undervaluation, ALKT represents an attractive investment opportunity in the expanding digital banking market.
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Click here for more stock analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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