Summary
- Q2 Holdings reported another great quarter of revenue growth, but operating losses widened.
- The company recently closed its acquisition of PrecisionLender, which expands addressable market from $8 billion to $10 billion.
- The stock price sold off this year as the company issued debt and diluted share count to raise cash.
- The stock is still about 25% below its 52-week high and is trading at a more reasonable price/sales valuation.
- The growth will likely continue, but profitability may be elusive for the foreseeable future.
Thesis
Q2 Holdings (QTWO) posted another stellar quarter of revenue growth, lapping the top range of its own guidance. Revenue was up 32% vs. Q3-18. This beat comes on the heels of the company making yet another acquisition to further boost growth and expand the company's total addressable market (TAM).
In October, the company closed its acquisition of PrecisionLender. The new business will add at least $3.5 million in revenue to the Q4-18 report. Absent the PrecisionLender revenue, the company maintained its full-year guidance of revenue of at least $315 million, which will represent 31% growth vs. 2018. Recent acquisitions are fueling growth stellar revenue growth but also resulting in higher operating costs. Operating losses nearly doubled compared to Q3-18 as the company hired more people and invested in the operations of its recent acquisitions.
Though the company appears to be quarters away from profitability, its continued revenue growth rate and tiny piece of its TAM make the company an interesting long-term bet on the small banking technology market. At a forward price/sales ratio of 11, the company's stock price is back in its normal valuation range of recent years after flirting with a P/S of 15 earlier this year. The company is ~25% off its 52-week high and may test that high within the next year if strong revenue growth continues.
Revenue Growth Exceeding Expectations
Q2 Holdings is a Texas-based provider of SaaS solutions to small banks, otherwise known as regional and community financial institutions (RCFIs). An RCFI is a bank with no greater than $50 billion in assets. The company provides software to RCFIs that enables them to provide slick websites and apps that are comparable to the online user experiences of the mega banks. RCFIs traditionally haven't possessed the resources or personnel of the large banks to create a user-friendly online banking experience.
