Decisive Partnerships And Innovative Payments Hub Propel Future Earnings And Market Positioning

Key Takeaways

• ACI Worldwide shows robust growth with significant increases in revenues and EBITDA in the Biller and Bank segments, indicating successful expansion and partnerships.
  
• Strategic investments in next-generation technologies and strong market positioning are poised to attract new customers, enhance existing relationships, and boost future earnings.
  
• Heavy reliance on seasonal volumes and early contract renewals, combined with slower Merchant segment growth and risky investments, may affect ACI Worldwide's revenue stability and margins.

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's increased revenues in the Biller segment, up by 13%, and a 20% rise in EBITDA from the previous year, indicate robust growth and a successful onboarding of new customer transaction volumes, particularly with a large new customer in the utility space, expected to positively impact future revenue growth.
  
• The Bank segment showed a significant revenue increase of 22% and a 53% rise in EBITDA compared to the previous year, attributed to strategic renewal contracts and expansions, such as a major partnership with a top bank in Malaysia for a full card modernization and real-time program, likely enhancing future earnings.
  
• Investments in next-generation payments hub program, focusing on development for deployment by year-end, are anticipated to attract new customers and strengthen existing customer relationships by offering advanced functionalities and AI capabilities on a flexible, cloud-native architecture, impacting future revenue streams.
  
• The strategic and expanded Worldpay partnership, which is part of more than $100 million in renewal contracts set to be recognized in the latter half of the year, showcases ACI Worldwide's ability to secure and expand significant partnerships, promising increased future earnings.
  
• ACI Worldwide's engagement in upcoming financial conferences and the recognition as one of the world's top FinTech companies signal strong industry positioning and market confidence, potentially attracting investor interest and positively impacting stock valuation through enhanced visibility and credibility in the market.

Assumptions

• Analysts are assuming ACI Worldwide's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.0% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $223.7 million (and earnings per share of $2.15) by about August 2027, up from $183.7 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 28.7x on those 2027 earnings, up from 28.3x today. This future PE is lower than the current PE for the US Software industry at 37.8x.
• Analysts expect the number of shares outstanding to decline by 3.63% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

Risks

• The seasonal nature of the Biller segment's outperformance, driven by tax-related volumes, suggests this growth may not be sustainable throughout the year, potentially impacting future revenue stability.
  
• The reliance on signing renewal contracts early to de-risk the full-year forecast could introduce variability in future revenue recognition timing, possibly affecting earnings predictability.
  
• The Merchant segment's slower revenue growth, despite improvements in profitability, indicates challenges in scaling this part of the business, which could limit overall revenue growth and margin expansion.
  
• Heavy investment in the next-generation payments hub program, while potentially strategic, carries execution risk and could impact near-term profitability if customer adoption does not meet expectations or delays occur.
  
• The increase in share repurchase authorization and execution suggests a use of capital that may not directly contribute to growth or operational improvements, potentially impacting net margins if not balanced with investment in growth initiatives.

Valuation

• The analysts have a consensus price target of $56.33 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 $1.8 billion, earnings will come to $223.7 million, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $49.67, the analyst's price target of $56.33 is 11.8% 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.