Dynamic Expansion Meets FOREWARN's Industry Ambitions Amidst Economic Optimism

Key Takeaways

• Strategic onboarding and sales investments are set to boost revenue growth and earnings through upselling and cross-selling opportunities.
  
• Expansion into new industries and favorable economic conditions could increase revenue streams and support long-term growth.
  
• Red Violet faces earnings volatility, revenue drop in real estate, increased sales costs, competitive pressure in new industries, and economic challenges affecting growth sustainability.

Catalysts

A software and services company, specializes in proprietary technologies and applying analytical capabilities to deliver identity intelligence in the United States.

• The continued investment in sales and marketing teams is expected to increase customer acquisition and expand existing customer relationships, potentially boosting future revenue.
  
• The strategic onboarding of high-value enterprise clients is anticipated to accelerate revenue growth and improve earnings by providing opportunities for upselling and cross-selling.
  
• FOREWARN's expansion into new industries and continued penetration of existing real estate associations can lead to additional revenue streams, supporting long-term growth.
  
• Favorable economic conditions, such as anticipated interest rate reductions, could boost transaction volumes across various verticals, positively impacting revenue and cash flow.
  
• Operational leverage and robust cash flow generation provide the company with the flexibility to strategically invest in growth initiatives, which could enhance profitability and earnings over time.

Red Violet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Red Violet's revenue will grow by 14.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 7.7% in 3 years time.
• Analysts expect earnings to reach $8.2 million (and earnings per share of $0.52) by about November 2027, up from $5.1 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 96.2x on those 2027 earnings, down from 100.5x today. This future PE is greater than the current PE for the US Software industry at 42.3x.
• Analysts expect the number of shares outstanding to grow by 4.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Red Violet Future Earnings Per Share Growth

Risks

• Red Violet's net income significantly decreased by $10.8 million or 86% in the quarter, primarily due to the absence of a one-time deferred income tax benefit, which could indicate volatility in earnings and affect investor confidence in consistent earnings growth.
  
• The company reported a decline in its real estate vertical, excluding FOREWARN, with a revenue drop of approximately 10% in the third quarter, which might signal challenges in sustaining revenue across all verticals, particularly if trends continue.
  
• Sales and marketing expenses increased by 43%, largely due to added personnel and higher sales commissions, potentially impacting net margins if the increased spending does not translate into proportional revenue growth.
  
• While FOREWARN's growth is solid, the text indicates ongoing competition in expanding into new industries, which could pressure revenue growth projections if market penetration is slower or costs to acquire new industries increase.
  
• The economic landscape remains uncertain with potential challenges from inflation, high-interest rates, and reduced consumer subsidies, which could impact Red Violet's collections and related verticals, thereby affecting revenue growth sustainability.

Valuation

• The analysts have a consensus price target of $43.0 for Red Violet 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 $106.7 million, earnings will come to $8.2 million, and it would be trading on a PE ratio of 96.2x, assuming you use a discount rate of 6.9%.
• Given the current share price of $36.95, the analyst's price target of $43.0 is 14.1% higher.
• 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.