The Chief Financial Officer is the person who is (or at least should be) the most knowledgeable regarding the financials of their company and its future revenue-generating potential. The CFO creates and analyzes revenue forecasts, and their job is to be immersed daily in the company's latest numbers.
On my Youtube channel Motivation 2 Invest, I once interviewed the CFO of Lemonade (LMND, Financial), a $2 billion tech company that trades on the New York stock exchange. From that interview, I gained an even greater respect for the CFO and their grounded role. The CEO tends to set the vision, but the CFO helps to translate this into real-world actions.
Thus, in this article, we will take a look at two techology stocks that have recently been bought by their CFOs.
1. Alkami Technology
Alkami Technology (ALKT, Financial) is a supplier of digital “banking as a service” solutions to banks, credit unions and fintech partners. The company offers a best in class user interface which creates a great banking experience for customers. Its services include digital bank account opening, loan origination and even data analytics powered by artificial intelligence.
According to Grand View Research, the global banking as a service industry is forecasted to grow at a 16.2% compounded annual growth rate and be worth nearly $75 billion by 2023.
The CFO trade
According to GuruFocus insider trade data for the stock, which is sourced from Form 4 and other insider trade filings with the SEC, on Dec. 5, Alkami’s CFO Bryan Hill purchased 40,000 shares at an average price of $12.97, which is approximately 4% cheaper than where the stock trades at the time of writing. The CFO’s investment equated to over half a million dollars. This is a fairly substantial datapoint.
Growing financials
Alkami reported strong financials for the third quarter of 2022. Revenue was $53.41 million, which increased by over 34% year over year and beat analyst estimates by $1.22 million.
The company reported a record 13.7 million live registered users on its platform, up by 2.3 million year over year.
Alkami has gained strong momentum as the banking partner of choice with seven new bank wins in 2022 with four in the third quarter alone.
Its loss per share was $0.22 for the quarter, which missed analyst estimates by $0.05. However, on an adjusted basis, the loss per share was $0.06, which beat analyst estimates by $0.01.
Alkmai has a strong balance sheet with $208.9 billion in cash and short term investments compared to $85 million in total debt, of which the vast majority is long term debt.
Valuation
Alkami is fairly challenging to value as it is still in the early stage of its growth journey and is not profitable. We do know the stock trades at a price-sales ratio of 6, which is cheaper than its historic levels.
Guru investor Chuck Royce (Trades, Portfolio) purchased the stock in the third quarter of 2022, based on his firm's latest 13F filing. During the quarter, shares traded for an average price of $14.56, which is ~7% more expensive than where the stock trades at the time of writing.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
2. Rapid7
Rapid7 (RPD, Financial) is a cybersecurity company, which offers a “unified” platform to its customers. Historically many businesses have purchased a series of “point solutions” in order to protect their IT environment. This was great in the short term, but now companies are finding they have a large “rats nest” of solutions that is complex and difficult to manage. Therefore Rapid7 aims to solve this problem with its single solution that offers threat protection and even automated threat remediation. This means if an I.T system is hacked, it can be cleaned and protected immediately, saving time and preventing further damage.
The CFO trade
CFO Timothy Adams purchased 2,500 shares of Rapid7 stock on Dec. 5 at an average price of $30 per share, which is close to where the stock trades at the time of writing. You can find this and other insider trade data on GuruFocus' insider trades page for the stock. The trade equates to a value of approximately $75,000.
Perhaps this buy may have been partially motivated by Rapid7’s stock price having declined 75% since its all-time highs in November 2021.
Mixed financials
Rapid7 reported mixed financial results for its third quarter of 2022. Revenue was $175.7 million, which increased by nearly 26% year over year but missed analyst estimates by $222,000. This looks to have been mainly driven by foreign exchange headwinds from the strong U.S. dollar.
A positive is that the company reported strong annual recurring revenue of $684 million, which increased by a rapid 24% year over year and was within management's guidance range. Management has laid out bold plans to reach over $1 billion in ARR by 2025.
A benefit of Rapid7’s unified approach is it has enabled the consolidation of its sales resources, which should result in greater efficiency in the long term. Its cybersecurity solution is also popular across many industries. For example, in the third quarter of 2022, Rapid7 signed a seven-figure deal with a major enterprise health care company.
Last year, the company acquired Intsights for $322 million in cash and stock in order to bolster its threat intelligence platform. This acquisition is now starting to pay off as synergies are beginning to develop.
Rapid7 reported a loss per share of $0.49, which means the company is not profitable. However, it still beat analyst expectations by $0.10. On an adjusted basis, the company did report profitabiltiy with earnings per share of $0.14, which surpassed analyst expectations by $0.09.
The company has a solid balance sheet with $251.6 million in cash and short term investments. The company does have fairly high total debt of $917 million, but the vast majority of this is long term debt, which is a positive.
Valuation
Rapid7 trades at a price-sales ratio of 2.85, which is 65% cheaper than its five-year average. The GF Value chart calculates a fair value of $108 per share for the stock but does warn of a possible value trap due to the declining profitability, though I do not believe this is an issue if the CFO is still buying.
In the third quarter of 2022, legendary investor Paul Tudor Jones (Trades, Portfolio) purchased over 113,000 shares of the stock based on his firm's 13F filing. During the quarter, the stock traded at an average share price of $61.73 per share. The stock is trading at approximately half this price at the time of writing and thus is substantially cheaper.
Final thoughts
Both Alkami Technologies and Rapid7 are stocks that have strong growth potential in my view, and their CFOs seem to agree based on their recent buys. Alkami aims to benefit from the growth of the fintech industry, while Rapid7 aims to benefit from the cybersecurity industry growth and vendor consolidation.
