Up 40%, ACI Worldwide Stock Can Still Grow More

After a 42% rally since March 23, ACI Worldwide’s stock (NASDAQ: ACIW) seems to still have room to grow based on its valuation. ACI Worldwide’s stock has rallied from $22 to $31 off the recent bottom compared to the S&P which moved around 50%. The stock is slightly behind the overall markets as investors are overly cautious about the impact of a decline in consumer demand on ACIW’s revenues, which provides software solutions for real-time electronic payments. Further, its stock is still down 19% from levels seen in late 2019.

ACI Worldwide’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential as its valuation implies it has further to go.

Some of this rise over the last 2 years is justified by the roughly 23% growth seen in ACI Worldwide’s revenues from 2017 to 2019. Further, it has been able to improve its net income from merely $5.1 million in 2017 to $67.2 million in 2019. 

The company has seen steady revenue growth over recent years, and its Price to Sales (P/S) multiple has also increased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard What Factors Drove 34% Change in ACI Worldwide Stock between 2017 and now? has the underlying numbers.

ACI Worldwide’s P/S multiple changed from around 3x in 2017 to close to 4x in 2019. While the company’s P/S is about 3x now, there is an upside when the current P/S is compared to levels seen in the past years – P/S of close to 4x at the end of 2019.

So what’s the likely trigger and timing for further upside?

ACI Worldwide offers software products and services primarily focused on facilitating electronic payments. Its solutions are used by banks, financial intermediaries, merchants, and billers, both in the U.S and international markets. Due to the Covid-19 crisis and a resulting economic slowdown, consumer spending has plunged further – it declined by 13.6% month-on-month in April 2020. With consumers refraining from discretionary expenditure, this affected the customer transaction volumes especially in Merchants and Billers customer-base, negatively impacting the company’s revenues for consumption-based contracts. However, easing the lockdown restrictions in most of the world will help boost consumer demand in the coming months. Further, adoptions of cashless payment options by consumers have increased during the Covid-19 crisis, which will benefit the overall transaction volumes. While the Q2 results were marginally better than the year-ago period, we believe ACI Worldwide’s Q3 results in October are likely to see some growth in its revenues. 

Further, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.  

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