Diversifying Beyond Goldman Sachs To Fuel Growth Through Corfinity And Calculated Deals

Key Takeaways

• Diversification of revenue streams through expanded customer base and investment in Corfinity platform indicates potential for stable growth and higher margins.
  
• Management's confidence shown by share repurchase and anticipated significant deals suggests a potential boost in future revenues and EPS.
  
• CoreCard faces revenue concentration risk, declining total revenue, revenue stream volatility, operating margin pressures, and uncertain global financial impacts, posing significant short and long-term challenges.

Catalysts

Offers technology solutions and processing services to the financial technology and services market in the United States, Europe, and the Middle East.

• Expanded customer base reducing reliance on largest customer, Goldman Sachs, indicates diversification of revenue streams, potentially stabilizing and growing future revenues.
  
• Anticipated growth in services revenue from onboarding new customers and through existing partnerships, suggesting an increase in future processing and maintenance revenue.
  
• Investment in new Corfinity platform to offer improved services, indicating potential for higher margins through technology upgrades and efficiencies.
  
• Repurchase of shares indicating confidence by management in the company’s valuation, potentially leading to an increase in earnings per share (EPS) due to reduced share count.
  
• Expected significant deals with large annual revenues in the medium term (2025-2026), suggesting a substantial boost in future revenues and market share expansion.

Assumptions

• Analysts are assuming CoreCard's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 18.9% in 3 years time.
• Analysts expect earnings to reach $11.7 million (and earnings per share of $1.43) by about September 2027, up from $1.6 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 11.9x on those 2027 earnings, down from 73.1x today. This future PE is lower than the current PE for the US Software industry at 38.7x.
• Analysts expect the number of shares outstanding to decline by 5.49% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Risks

• Heavy reliance on a single customer, Goldman Sachs, contributing to 63% of revenues, creates revenue concentration risk and could significantly affect revenues and profits if the relationship changes.
  
• A 12% year-over-year decrease in total revenue, driven by lower license and professional services revenue, indicates potential challenges in sustaining growth, impacting future earnings and net margins.
  
• The absence of license revenue in the quarter, combined with flat processing and maintenance revenues, suggests potential volatility in revenue streams, affecting net margins.
  
• Ongoing investments in the new platform, despite being necessary for long-term growth, result in current operating margin pressures, decreasing from 17% to 8% year-over-year, influencing short- to medium-term profitability.
  
• The global financial environment's impact on fintech and smaller banks, implying a shift or reduction in business activity from these segments, could lead to unforeseen revenue and growth challenges.

Valuation

• The analysts have a consensus price target of $19.0 for CoreCard 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 $61.8 million, earnings will come to $11.7 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $14.49, the analyst's price target of $19.0 is 23.7% 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.