The Big Idea
Every now and then I find myself going to a physical banking branch to take care of an odd task. Maybe once or twice a year.
It’s fair to say I go to an auto supply store more often. Maybe even to Staples. Or TJ Maxx.
In other words, going to the bank is a rare event.
Digital banking has taken off over the last decade because people and businesses have realized they rarely need to go to a physical bank to manage their money, take out a loan, process payroll, etc.
It’s also been a win for financial institutions (FIs) that have shaved costs by moving client interactions from in-person to digital.
These service-type interactions are just the beginning of what digital banking solutions have done to the industry.
More than ever, FIs are using digital banking platforms as revenue generators.
By tapping into the real-time data flowing through their platforms, they’re getting better at enticing people to take out new loans, open new accounts, buy CDs, sign up for rewards-based debit cards and much more.
The evolution from FIs just offering standard banking services to becoming more like marketing technology companies has only been possible thanks to advanced, cloud-based digital banking platforms.
Today, we’re jumping into a small-cap company that has the fourth-largest digital banking platform in the market. It’s growing revenue by double digits, is profitable and is beating the competition because it has better products.
The Company
Alkami Technology (ALKT) provides white-label digital banking software solutions to credit unions and small and mid-sized regional banks in the U.S.
Its cloud-based solutions help these smaller financial institutions (FIs) compete more effectively with bigger, more technologically advanced and well-capitalized banks.
The company’s innovative Alkami Digital Banking Platform is built on Amazon Web Services (AWS) and features multi-tenant architecture and a single code base.
The platform integrates with third-party fintech solutions and is the hub where consumers, businesses and FIs interact.
The critical functionalities permitted by multi-tenant architecture are not possible with old-school, on-prem software, or even single-tenant cloud solutions. This architecture allows Alkami’s clients to onboard and engage new users, boost revenues, and significantly enhance operational efficiency.
This is part of why Alkami is growing registered users at a 15% annual clip versus closer to the 5% to 8% rate of legacy providers.
The Plano, Texas-based company was founded in 2009 by Stephen Bohanon and is currently the fourth-largest player in the fragmented U.S. market for digital banking software solutions, where the big three hold just under 40% market share.
Of the roughly 9,000 FIs in the U.S., Alkami is targeting a subset of roughly 2,500. This target market excludes the nine megabanks as well as the 3,700 smallest FIs out there, prioritizing targets likely to grow organically and through acquisitions.
This target market covers around 250 million users.
Alkami started out by focusing on solutions for retail banking and has built out more significant solutions for business banking over the years. It serves more than 650 clients, 266 of which are FI clients on its digital banking platform (+12 in Q3). It has 19.5 million users (+15% in Q3), implying a ton of growth potential.
Alkami has a market cap of $3.5 billion.
The Platform & Solutions
Alkami’s Digital Banking Platform was designed to give FIs a complete digital banking solution that fulfills the needs of their retail and business customers.
It is an AWS-powered, multi-tenant cloud-based solution that avoids the frequent downtime during testing and upgrades that plagues on-prem and single-tenant platforms.
There are four main reasons customers turn to Alkami’s platform. It’s able to:
(1) Onboard new users efficiently
(2) Engage users with self-service functions, proactive alerting and financial insights
(3) Grow revenues and registered users through new product and service offerings
(4) Guard registered user data and interactions to mitigate fraud.
The image below shows these four high-level platform attributes as well as the 10 core sales and service functionalities offered through the company’s current lineup, which includes 33 products and over 300 integrations.
Here’s a brief summary of each of the 10 product categories.
Sales Products
Digital Account Opening: Facilitates the opening of new deposit accounts (checking, savings, CD, Money Market) digitally, replacing the need for physical branch visits.
Marketing: Delivers tailored, timely content through targeted campaigns and educational outreach.
Data Insights: Provides internal analytical tools and data models, enabling better customer preference, lifestyle, and financial needs prediction.
Card Experience: Offers cardholder alerts, control preferences, self-service maintenance features, and digital card capabilities.
Money Movement: Includes integrated tools to increase deposits, facilitate payments and transfers, and ensure consistent user engagement, seamlessly integrating third-party services.
Service Products
Customer Service: Digitizes and streamlines communication, offering SMS, push notifications, digital authentication, and chat tools for both digital and human interaction.
Commercial Banking: Provides real-time cash position insights and comprehensive solutions for payment, receivables, sub-user management, billing, fraud prevention, and actionable reporting.
Financial Wellness: Aggregates financial information, including account aggregation, credit score monitoring, transaction data enrichment, home value tracking, savings goals, and access to third-party financial products.
Security & Fraud Protection: Features risk-based multi-factor authentication, suspicious transaction monitoring and multi-channel payment fraud prevention.
Extensibility: Empowers clients to extend the platform using SDKs and APIs, integrate with internal systems and the fintech ecosystem, and customize workflows and user experience.
Growth Initiatives
Grow Clients and Registered Users: These are the two most important metrics and Alkami is growing them faster than the competition. Over the last 12 months, the company has implemented 37 new FIs with 1.2 million digital users while adding 1.4 million new users from existing clients. With a total digital banking FI client count of 266 and registered users of 19.5 million vs. a target market of 2,500 FIs and 250 million users, there’s a long runway to keep growing.
Grow Product Lineup & Cross Sell: Alkami currently has 33 products. Newer clients have purchased an average of 19 products versus closer to 13 to 14 for older clients. This means that as established clients come up for contract renewal they need to add more solutions to keep up with their competitors. With add-on sales (especially security, data, client services and financial wellness solutions) representing 46% of YTD revenue and Revenue Per User (RPU) of $17.54 in Q3 (+8%), the trends look solid. I expect Alkami to focus new product development efforts on customer experience, data and fraud.
Margin Expansion: While Alkami is one of the fastest growers in its space, its profit margin still trails that of its peers. That should change as the revenue base grows and the company gains operating leverage. Gross margin in Q3 was 62.8% (+4% vs. a year ago) and management’s 2026 gross margin target is 65%.
Offshoring to Help Profitable Growth Beyond 2026: In 2023 Alkami began to source engineering talent through a third-party outsourcing model with the goal of growing quickly while also controlling costs. This initiative appears to be working well, and management expects the transition to be complete in 2026. The goal here is to continue to push growth initiatives while controlling costs, not to simply cut costs.
Data-Driven Products: Alkami is starting to be recognized for its data and marketing solutions, which have been included in 70% of 2024 client wins, up from 60% in 2023. These products have driven over 20% of add-on sales through the first three quarters of the year.
Business Model
Alkami prioritizes long-term relationships with clients through subscription-based contracts that align its growth with client success. The average contract length is 70 months, and pricing tiers are based on both client minimum commitments and the number of registered users. As registered users grow, clients earn per-registered-user discounts, so they are incentivized to promote digital solutions.
The Bottom Line
Revenue in 2023 grew 30% to $265 million while adjusted EPS loss improved to -$0.04 from -$0.23 a year earlier. Through the first three quarters of 2024, revenue grew by 26% to $244 million and EPS improved from -$0.06 to $0.18.
In Q3 the company added nine new digital banking clients and launched a quarterly record-tying 12 clients on the Alkami platform, bringing total FI digital platform client count to 266.
Analysts expect Q4 revenue to grow by 25.6% to $89.6 million (in line with guidance) and EPS to improve from $0.03 to $0.08, implying full-year 2024 revenue growth of 26% (to $333.8 million) and EPS of $0.27.
Looking out to 2025, we should expect revenue to grow by around 25% to $416 million and EPS to grow 88% to $0.50.
Risk
- Competition: Alkami wins clients by taking them away from other providers. If the company fails to keep pushing the envelope with products, technology, and sales & marketing it may lose its competitive advantage.
- Customer Penetration: The initial sale to a customer is just the starting point. From there it’s all about selling more solutions to the customer and increasing the number of registered users. Failure to do either could break the incentive alignment revenue structure that helps drive Alkami’s growth.
- Market Consolidation: This can be either a good or a bad thing, depending. If an Alkami customer is an acquirer that’s good (more registered users). If a customer is being acquired, that may be bad if the acquirer doesn’t use Alkami.
- Interest Rates: While Alkami has products that help customers in rising, falling and flat interest rate environments, it’s still a growth stock. That means ALKT stock is prone to the same gyrations impacting other growth-y names when interest rates jump (as they have done lately).
Competition
NCR Voyix (VYX), Temenos AG (TMNSF), Fiserv (FI), Fidelity National (FIS), Jack Henry (JKHY), Q2 Holdings (QTWO).
The Stock
Trading Volume: ALKT trades an average of 840,000 shares daily. We’re not likely to move this stock.
Historical Price: ALKT came public at 30 in April 2021 and almost hit 50 in the first days of trading. But the juice began to run out of the bull market later in 2021, and a year after going public, ALKT was trading at half its IPO price. There wasn’t much to get excited about with respect to the stock price through 2023, then shares finally broke out to multi-year highs above 19 following the Q3 2023 earnings report on November 1, 2023. On a weekly chart, ALKT has made a series of higher highs and higher lows since then, with the most recent high (11/25/24) being 42.3. The stock’s action has been a little choppy since then, with a notable dip below both the 25- and 50-day moving average lines on December 30 and a little follow-on weakness in early January. The current price around 35.8 has ALKT trading at the high end of a 37-day consolidation phase (28 to 36) that occurred last August – October, which appears to be a good entry point.
Valuation: ALKT trades with an EV/Revenue multiple of 9x based on estimated 2025 revenue. That’s a slight premium as compared to peers.
Short-Term Buy Range: Expect to buy in the 34 to 38 range in the very short term. We will start with a half-sized position in case ALKT breaks lower. BUY HALF
The Next Event: Q4 2024 report around February 20.
Current Recommendations
| Ticker | Stock Name | Date Bought | Price Bought | 1/8/25 | Profit | Rating |
| ALKT | Alkami Technology | 1/8/25 | NEW | 36.1 | NEW | Buy Half |
| AORT | Artivion | 6/5/24 | 23.3 | 29.8 | 28% | Buy |
| AVPT | AvePoint | 9/5/24 | 11.6 | 16.7 | 44% | Hold |
| DCBO | Docebo | 12/7/23 | 44.6 | 43.1 | -3% | Buy |
| ENVX | Enovix | 10/6/22 | 20.4 | 12.9 | -37% | Buy |
| FIP | FTAI Infrastructure | 8/1/24 | 10.2 | 8.2 | -19% | Buy |
| MAMA | Mama’s Creations | 7/3/24 | 7.2 | 6.9 | -4% | Buy |
| PTON | Peloton | 11/7/24 | 8.1 | 8.6 | 7% | Buy Half |
| PPTA | Perpetua Resources | 12/4/24 | 10.7 | 12.5 | 17% | Buy Half |
| WEAV | Weave Communications | 1/4/24 & 5/9/24 | 10.1 | 15.9 | 57% | Buy |
| WLDN | Willdan Group | 10/3/24 | SOLD | SOLD | -2% | SOLD 12/13/24 |
| ZETA | Zeta Global | 5/2/24 | SOLD | SOLD | 55% | SOLD 12/19/24 |
Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.
Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.
Please note that, unless otherwise credited, all images in this Issue are sourced from Perpetua Resources’ October Investor Presentation, which can be found here.
The next Cabot Small-Cap Confidential issue is scheduled for
February 6, 2025.
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