Strengthened Partnerships Will Boost Revenue Stability But Reliance On Real-Time Payments May Affect Profitability

Key Takeaways

• Strengthened contract activity and partnerships enhance revenue stability, growth, and margins by reducing seasonality and expanding capabilities.
  
• Advancements in real-time payments and cloud-native platforms boost market opportunities, long-term revenue, and scalability.
  
• Reliance on real-time payment revenue and execution risks on new projects may lead to inconsistent income and affect ACI's stable revenue growth and profitability.

Catalysts

A software company, develops, markets, installs, and supports a range of software products and solutions for facilitating digital payments in the United States and internationally.

• ACI Worldwide is accelerating the signing of contracts, both renewal and new, which helps to derisk their revenue target attainment and reduce traditional seasonality, positively impacting revenue stability and growth.
  
• The company's strong pipeline momentum entering 2025 sets the stage for continued revenue and EBITDA growth, indicating a robust outlook and potential for improved earnings.
  
• Real-time payments, a rapidly growing area with a 72% increase in revenue, highlight significant market opportunity that can drive long-term revenue and margin growth as adoption increases worldwide.
  
• ACI's development of a next-generation, cloud-native payments hub platform is poised to expand their addressable market into different customer segments, potentially boosting future revenue streams and net margins through scalability and efficiency.
  
• Strategic hires and partnerships, like the signing of a contract with QuikTrip and the hiring of a new Head of Merchant Solutions, could enhance their capabilities and service offerings, driving incremental revenue growth and improving margins through increased operational efficiency.

ACI Worldwide Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ACI Worldwide's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.0% today to 11.7% in 3 years time.
• Analysts expect earnings to reach $223.6 million (and earnings per share of $2.12) by about December 2027, down from $227.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.3x on those 2027 earnings, up from 24.8x today. This future PE is lower than the current PE for the US Software industry at 42.0x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.37%, as per the Simply Wall St company report.

ACI Worldwide Future Earnings Per Share Growth

Risks

• The reliance on real-time payment revenue, which can be lumpy, may lead to inconsistent income streams, possibly affecting ACI's ability to maintain stable revenue growth.
  
• The Biller segment's performance could be vulnerable to fluctuations, as highlighted by the decline in adjusted EBITDA and the emphasis on high-margin nonrecurring revenue from prior periods, which may lead to less predictable future revenues and profit margins.
  
• Increased pricing pressures and the challenge of maintaining pricing power over the long term could impact profitability, particularly if not balanced with value addition to customers.
  
• The execution risks associated with developing and implementing the new payments hub platform may pose a threat to projected future earnings if customer uptake does not meet expectations or if development timelines are delayed.
  
• The company's high leverage, despite improvements, combined with global economic uncertainties, could limit financial flexibility and investment capacity, potentially impacting future growth and margins.

Valuation

• The analysts have a consensus price target of $64.2 for ACI Worldwide based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $223.6 million, and it would be trading on a PE ratio of 37.3x, assuming you use a discount rate of 7.4%.
• Given the current share price of $53.77, the analyst's price target of $64.2 is 16.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.