MLNK - MeridianLink Is Undervalued Considering The Potential Of Its Marketplace

Summary

• MeridianLink enhances the digital transformation inside banks, credit unions, and mortgage lenders.
• In my view, if the company successfully capitalizes on the one-time service fees from its partners, the company’s platform may become more cost efficient.
• It is also worth noting that partners could offer valuable feedback, which could help MLNK redesign its offerings.
• Under a simplistic DCF model, I obtained a valuation of close to $22.98 per share and an IRR close to 6.9%.

MeridianLink, Inc. ( MLNK ) reports a large list of business clients and a significant number of software products. I am quite optimistic about the potential success of the company’s marketplace, which could significantly lower the FCF margin, and enhance the MLNK’s stock valuation. Even considering potential risks from failed commercialization or lack of technological developments, the stock appears too cheap.

MeridianLink

With more than 20 years in the industry, MeridianLink enhances the digital transformation inside banks, credit unions, and mortgage lenders. Management claims to contribute to create a superior client experience thanks to SaaS-based lending solutions.

Considering the adjusted EBITDA margin and recent sales growth, I believe that k will do good by having a quick look at the products offered by MLNK.

There are two main features of MLNK, which make it a solid business model. First, the number of clients is quite large. In a recent presentation, the company reported about 1.9k customers, making MLNK’s revenue quite diversified. Besides, we are talking about a company that provides a large list of software for various products including mortgage, credit card, personal, auto, home equity, and small business loans.

Finally, it is worth noting that financial services SaaS expenditure is expected to increase from $10 billion in 2019 to $19 billion in 2024. In sum, MLNK is not only growing because it offers unique software, it is also operating in a growing market.

MLNK Appears To Know Well How To Grow Organically And Inorganically

There appear to exist significant growth opportunities driven by end-market expansion and geographic extension. Management recently noted that the market of smaller institutions is pretty much unserved, and could represent organic growth for MLNK.

In our down market, smaller institutions commonly use spreadsheets or other inexpensive alternatives. These companies have a smaller volume of loans per month, but we have developed targeted solution packages with lower implementation fees to address their primary needs. Source: 10-k

Besides, among other growth drivers reported by MLNK, I believe that digital lending, data insights, and marketing automation could enhance sales growth even further. Moreover, management believes that new products and internationalization could also represent a catalyst for sales growth.

We are focused on introducing new solutions and enhancing services and capabilities in areas including digital lending, data insights, collections, data verification, and marketing automation.

In addition, we believe that enhancing our capabilities to serve customers in international markets represents an opportunity. Source: 10-k

I believe that the company’s expertise in the M&A markets is worth noting. MLNK demonstrated that management knows well how to handle the negotiation process and acquire competitors.

We seek to capture additional growth driven by new logo acquisition, organic cross-sell and upsell opportunities with our customers, and potential acquisitions. Source: 10-k

Considering the FCF growth and current amount of leverage, we can’t rule out the possibility of seeing more acquisitions, which would most likely bring more sales growth, and may enhance the FCF margins. The following is a list of the companies acquired.

In November 2020, we acquired Teledata Communications, Inc., or TCI.

In December 2020, we acquired substantially all of the assets of TazWorks, LLC, or TazWorks.

In April of 2021, we acquired Saylent Technologies, Inc., or Saylent. Saylent is a data analytics and marketing solution. Source: 10-k

In April 2022, we acquired StreetShares, Inc. Source: 10-Q

The New Partner Marketplace Could Enhance Sales Growth, And Create Networking Opportunities

Among the recent developments delivered recently, I would note the company’s Partner Marketplace. In my view, if the company successfully capitalizes on the one-time service fees from its partners, the company’s platform may become more cost efficient. Free cash flow margins cloud increase. Besides, it is also worth noting that partners could offer valuable feedback, which could help MLNK redesign its offerings.

Market Expectations Include FCF/Sales Growth And 8.1% Sales Growth

I studied the expectations of market analysts about MLNK. I believe that they are that optimistic that investors should have a look at them.

2024 net sales would stand at $339 million with 2024 net sales growth of 11.51%. Besides, 2024 EBITDA would be close to $134 million with operating profit of $75.2 million and an operating margin of 22.20%. In addition, pre-tax profit will likely be close to $21.5 million. Finally, let’s note that investors are expecting 2024 net income of $15.3 million, which would be considerably more significant than that in 2023 and 2022. 2024 FCF would be $92.5 million with FCF/sales of 27.29%.

Balance Sheet

As of September 2022, the company reported cash of $115.752 million, accounts receivable of $32.034 million, and prepaid expenses of $12.542 million. In sum, total current assets were close to $190.328 million, close to 4x the total amount of current liabilities.

Non-current assets include property and equipment of $5.044 million together with a right of use assets of $2.638 million, intangible assets of $279.548 million, and goodwill worth $571.554 million. Finally, total assets stood at $1.063 billion.

MLNK’s liabilities include accounts payable worth $2.173 million, accrued liabilities of $29.807 million, deferred revenue of $22.665 million, and a current portion of long term debt of $3.367 million. Total current liabilities were equal to $58 million.

Long term debt was equal to $423.599 million together with other long term liabilities of $1.527 million and total liabilities of $483.506 million. I expect FCF to be close to $90 million in the coming years, so I don’t believe that the total amount of debt appears that significant. In my view, most investors wouldn’t be worried.

My Cash Flow Model Implied A Fair Price Of $22.98 Per Share

My cash flow model included 2027 net income of $1.176 million, 2027 depreciation and amortization of $64.817 million, and share based compensation of $39.486 million. I also assumed a loss on debt repayment of $12.775 million, changes in accounts receivable of $2.080 million, changes in prepaid expenses and other assets of -$7.356 million, and changes in accounts payable of $0.150 million. Finally, changes in deferred revenue would be $4.926 million, which would imply a net cash provided by operating activities of $129.428 million. If we also assume capital expenditures of -$2.370 million, 2027 FCF would be $127.058 million.

If we assume a WACC of 9%, which is close to what other investors are assuming, the net present value of FCF would be close to $436.165 million. If we also assume an EV/FCF of 21x, which is pretty much the multiple at which the company trades today, the terminal value would stand at around $2.668 billion. I also obtained a net present value of terminal value of $1.7 billion.

If we sum everything, the firm value would stand at $2.17 billion accompanied by an equity of $1.85 billion and a fair price of $22.98. The internal rate of return would be close to 6.93%.

Risks Include Failed Commercialization Or Lack Of Technological Developments

In my view, MLNK could have serious trouble if industry participants fail to understand that software solutions can be much better than traditional processes like email, mails, or business presentations. The consumer market appears to be significantly fragmented, which means that MLNK has to talk to many potential customers. Some of them may not even know the functionalities of software like that of MLNK.

Due to the fragmented nature of the consumer lending (including mortgage) and consumer reporting agency industries, many industry participants may not be familiar with our software solutions and the benefits of our solutions.

We must enhance the features and functionality of our software solutions and convince financial institutions of the benefits of our software solutions and encourage them to switch from competing loan origination, digital lending, and data analytics solutions or to forgo using more traditional processes. Source: 10-k

It is also worth noting that many existing clients don’t have an obligation to continue their subscription to the company’s software. If clients find alternatives in the market, or don’t obtain benefits from MLNK’s software, they may stop paying for the software.

Our customers have no obligation to renew their subscriptions for our software solutions after the expiration of the initial or current subscription term, and our customers, if they choose to renew at all, may renew for shorter subscription terms, or on less favorable usage-based or volume-based pricing terms. Source: 10-k

Conclusion

MeridianLink has a long list of business clients and software offerings for many different products. Management is also implementing a new marketplace, which could significantly lower operating expenses, and enhance FCF generation. Under a simplistic DCF model, I obtained a valuation of close to $22.98 per share and an IRR close to 6.9%. I did see some risks from failed commercialization or lack of technological developments, however the company appears too cheap at its current market price.

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