Alkami Stock: Still No Alchemy To Be Found Here (NASDAQ:ALKT)

In May of last year, I concluded that Alkami (NASDAQ:ALKT) was not seeing alchemy yet, just weeks after its initial public offering. Shares traded around the $30 mark in May, down a third from levels in the mid-forties in April already. Ever since, shares have lost another 50% of their value; as this move has created appeal for the simple reason that shares have fallen, as consolidation of growth and lack of operating leverage prevents me from getting too upbeat here.

Former Take

Founded in 2009, Alkami provides cloud-based digital banking solutions for financial institutions to serve their customers both more efficiently and effectively. Customers require seamless interaction, but this is complicated by the need to access banking services from multiple devices, applications, all while security becomes ever more paramount.

The company focuses on smaller banks: including community, regional and super-regional banks, especially those financial institutions which have lagged in terms of technological adoption. The need for technological updates, safety, consumer demand and regulatory changes have been drivers behind adoptions of technology solutions, like the ones provided by Alkami.

Trading at $30, Alkami supported a $2.2 billion operating asset valuation, that is a valuation applied to a business which posted $73 million in revenues in 2019, with revenues up 52% that year. The issue is that operating losses were steep and came in around $42 million.

Revenues rose another 52% to $112 million in 2020, as operating losses narrowed slightly in absolute terms to $35 million, and even more so on a relative basis. With revenues trending at $133 million a year based on the fourth quarter results for 2020, the company traded at 16 times annualized sales at $30.

That was not enough for me to see appeal just yet, as first quarter sales for 2021 rose 43% to $33 million, with revenues in line with the fourth quarter of 2020. Despite the growth, the company still posted a $9 million quarterly operating loss. These results and a non-convincing second quarter outlook prevented me from getting upbeat just yet back in May.

With the company guiding for a run rate of $150 million in sales, I was noticing slower growth and operating leverage coming to a near standstill, no convincing arguments albeit that valuation has been reset in a minor way already.

Reset Continues

After shares were trading around the $30 mark in May, the valuation reset has only continued as shares gradually fell to the $20 mark by year-end of 2021, as shares have fallen further and trade near their lows of $15 per share here. This continued reset came as underlying results were somewhat mixed. Second quarter sales rose 38% to nearly $37 million, yet adjusted EBITDA losses of $5.4 million were still substantial. Third quarter sales were up 37% to nearly $40 million, yet EBITDA losses of $6.1 million were flattish again.

In February, it was apparent that fourth quarter revenue growth slowed down to 27% as revenues came in at $42 million and change, with EBITDA losses narrowing a bit to $4.4 million. For the year, the company posted $152 million in revenues and just over a $22 million EBITDA loss, as a net loss of nearly $47 million was reported in the meantime. The company guided for revenues at a midpoint of $190 million for the year 2022, which looks solid, yet EBITDA is only set to improve in a very modest fashion to a loss between $18 and $21 million.

With nearly 89 million shares outstanding, equity of the company is now valued at $1.33 billion, although this includes a near $300 million net cash position, for an operating asset valuation just north of a billion. This values the business at 5-6 times forward sales, all while earnings are non-existent, as the pace of progress here is shockingly slow.

In March, the company announced a surprising deal as it reached a deal to acquire Segmint, a leader in making account and transaction data usable for financial institutions to deepen customer relationships. A $136 million deal tag comes in at roughly an eighth of the enterprise value, so this is a significant deal. With revenues pegged at $7 million for the remainder of the year, based on a closing date at the end of June, this reveals a $14 million revenue run rate. That seems to understate the commercial traction as the company reports annual recurring revenue under contracts at $16 million. This works down to roughly 8 times sales, a higher multiple than the valuation multiple at which Alkami trades, no surprise given the relentless pressure seen in the shares.

And Now?

The latest deal will deplete roughly half the cash position of the firm and with a 5-6 times forward sales multiple, valuations look reasonable. On the other hand, growth has slowed down to 20%, but moreover the margin profile has been lackluster as the company posts still substantial EBITDA losses, with realistic losses still reported at double-digit percentages, with few improvements reported on this front as of late.

The truth is that over the past year the valuation reset has continued, albeit that growth has seen continued slowdown, but losses have stabilized. Of course, the valuation has been reset, yet the entire environment related to technology and IPO names is completely different now as it was last year. Of course, the valuation reset has been huge, as the fundamental story is tough amidst slower growth but moreover a continuation of losses.

Amidst these moving parts, it is time to become more upbeat, simply for the valuation reset on its own, but that should not be confused with me getting upbeat. After all, the losses remain quite steep as the lack of progress makes it very easy for me to still avoid the shares here today.