Alkami Technology: Good Growth With EBIT Margin Inflecting Upwards

Core Viewpoint - Alkami Technology (NASDAQ:ALKT) is recommended as a buy due to its large market potential and opportunities for upselling products in the digital banking sector, which is seen as a necessary evolution for financial institutions [2][11]. Business Overview - ALKT provides white-label banking solutions to US-based credit unions and small to mid-size regional banks, operating on a 100% cloud-based platform that integrates with third-party fintech services [3]. - In 1Q24, ALKT reported revenue of $76.1 million, a 26.9% increase year-over-year, surpassing the consensus estimate of $75.6 million, driven primarily by a 27% growth in subscription revenue [3]. - The number of live users grew from 17.5 million in 4Q23 to 18.1 million in 1Q24, reflecting a ~19.8% annual growth [3]. - Gross margins improved by 360 basis points to 61.7%, and EBIT improved from -$4 million in 1Q23 to $3 million in 1Q24, with margins at approximately 4% [3]. Market Potential and Upsell Opportunities - ALKT targets financial institutions with assets ranging from $500 million to nearly $50 billion, representing over 250 million potential users [5]. - A survey indicated that 81% of users access banking services online daily, highlighting the increasing demand for ALKT's solutions [5]. - ALKT offers 32 products with a blended Average Revenue Per User (ARPU) of $58, but there is potential to more than double this ARPU as the average product per client is only 13 [5]. - Management noted an increase in the average number of products sold per order, from 10 in 2018 to 18 in FY23, indicating a growing acceptance of ALKT's offerings [5]. Margin Expansion - ALKT is experiencing gross margin expansion, with management expecting an increase of over 200 basis points in FY24 due to improved operations and lower hosting costs [8]. - New businesses are being acquired at a gross margin of 67%, while renewal businesses are at 70%, indicating strong potential for further margin improvement [8]. Valuation - Based on a forward revenue approach, ALKT is valued at approximately $36, with a projected growth rate of 27% over the next two years [9]. - The valuation has improved from -4.5x to 7.3x since June 2023, and it is expected to continue trending upwards as revenue grows and EBIT margins improve [9].