AI Banking And nSight Launch Will Broaden Digital Banking Services

Key Takeaways

• Strategic pivot to AI banking and product enhancements are expected to drive revenue growth and improve customer retention and efficiency.
  
• Recent acquisitions and international market investments could expand service offerings and increase cross-selling, positively impacting revenue growth and market share.
  
• Market share and revenue growth are at risk due to execution challenges, acquisition integration, and potential customer resistance to new pricing models.

Catalysts

A software-as-a-service company, provides software solutions to financial institutions in the United States, the United Kingdom, and internationally.

• nCino's strategic pivot to become a leader in AI banking, leveraging its cloud banking software foundation, is expected to drive revenue growth and improve net margins by enhancing customer efficiency and operational capabilities across its platform.
  
• The launch of new AI-powered functionalities at the nSight user conference and ongoing enhancements in product offerings like Banking Advisor indicate potential improvements in subscription revenue and customer retention rates.
  
• Recent acquisitions, including DocFox, FullCircl, Allegro, and Sandbox Banking, are anticipated to expand nCino's service offerings, particularly in consumer lending and onboarding, thereby increasing cross-selling opportunities and accelerating bookings and revenue growth in future quarters.
  
• Strengthening of the go-to-market team, especially in EMEA, and investments in sales and marketing indicate a potential increase in international market share, expected to positively impact gross bookings and long-term revenue streams.
  
• The transition to platform pricing is expected to result in a revenue growth benefit, particularly in the next fiscal year, contributing to a reacceleration of subscription revenue growth and improved earnings due to better alignment of pricing with customer value delivery.

nCino Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming nCino's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -7.0% today to 3.7% in 3 years time.
• Analysts expect earnings to reach $25.8 million (and earnings per share of $0.2) by about May 2028, up from $-37.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 150.3x on those 2028 earnings, up from -74.8x today. This future PE is greater than the current PE for the US Software industry at 34.9x.
• Analysts expect the number of shares outstanding to grow by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

nCino Future Earnings Per Share Growth

Risks

• A shift in market dynamics, particularly the easing of macroeconomic headwinds, might not boost revenue in the short term due to the inherent lag in translating bookings into recognized revenue, potentially impacting earnings forecasts.
  
• Interruptions in execution in the commercial space, which is nCino's core strength, could lead to competition eroding its market share, thereby affecting the company’s future revenue growth projections.
  
• The company's dependency on successful integration and execution following recent acquisitions, such as DocFox and FullCircl, creates risk; failed integrations could prevent anticipated enhancements in service offerings, negatively impacting revenue aspirations.
  
• nCino's introduction of a new salary and incentive-fueled pricing model may face customer resistance or adaptation challenges, potentially resulting in stagnant or even reduced subscription revenues.
  
• The delay in product development and integration, particularly in Consumer Lending, poses risks of competitive displacement in high-growth areas, potentially leading to missed revenue and market share opportunities.

Valuation

• The analysts have a consensus price target of $25.929 for nCino based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.0, and the most bearish reporting a price target of just $19.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $695.5 million, earnings will come to $25.8 million, and it would be trading on a PE ratio of 150.3x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $24.6, the analyst price target of $25.93 is 5.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.