2024-01-08 23:50:42 ET
Summary
- NICE Ltd. is a cloud-based AI-driven software company that has transformed itself to adapt the SaaS model and combine cloud technology with AI technology.
- The company's business segments include Customer Engagement and Financial Crime and Compliance, with a focus on data analytics and AI.
- NICE has achieved profitable growth, quadrupling its operating cash flow in the last decade, and has strong margins and above-average growth rates. However, its valuation may be slightly high.
NICE Ltd. ( NICE ) is a cloud-based AI-driven software company based in Israel. The company has been transforming itself in recent years to adopt the SaaS (software-as-a-service) model similar to many other software companies which enabled it to create recurring and predictable revenues. More importantly, the company also made major advancements in how it combined cloud technology with AI technology in order to boost its product offerings which helped fuel its growth. Meanwhile, the company's valuation might have been a bit stretched after the most recent rally so it probably needs a minor correction or pullback in order to create another buying opportunity.
While the stock is up almost 400% in the last decade, at one point it was up more than 600% but its valuation was probably a bit stretched back then with a P/E ratio well above 100.
Let us talk about the company's business a little bit before getting into its numbers and financials. The company currently has 2 major business segments. The company's first and biggest segment is Customer Engagement followed by its second segment of Financial Crime and Compliance. The main customers of the first segment could be any large company that uses data analytics in order to improve their customer or employee engagement whereas the second segment's customers mostly include financial corporations and government agencies across the world that are trying to analyze massive streams of financial transaction data and patterns quickly in order to identify possible cases of fraud, money laundering or other financial wrongdoings. AI and machine learning are becoming a big part of both of the company's segments because a lot of data needs to be analyzed and personalized at once and it's very difficult if not impossible to run millions of analyses manually.
The company aims to create a highly integrated solution that offers a full suite of applications rather than a piecemeal approach where there is a need to buy different solutions from different companies which may or may not work together with each other. One-in-all solutions offered by the company would not only save money for customers but also allow them to save time and effort in terms of integrating all their solutions together and building custom applications in order to make different solutions work together which is a very costly challenge.
There is a huge drive across the world right now but in corporations and government agencies to digitalize everything, use more cloud sources and use predictive analytics powered by AI which will become disruptive in the future and NICE is one of those companies that seems to be at the center of all three processes (digitalization, cloudification, and more AI utilization).
In recent years the company improved its analytics offerings by acquiring Nexidia, its cloud offerings by acquiring inContact, and boosted its digitalization efforts by entering 35 different markets using a variety of self-service solutions starting in 2020. One thing the company aims to accomplish is profitable growth which is hard to come by these days in small-cap cloud companies. It is often assumed that a company has to go many years sacrificing profits in favor of growth and not worry about profitability until much later when its growth rates slow significantly. NICE has been prioritizing growth and profitability and actually using its profits to build more products and enter more markets to fuel its growth.
As a matter of fact, within the last decade, the company boosted its cash from operations (also known as operational cash flow) from $140 million to $560 million which means it quadrupled its operating cash flow in just one decade.
The company's margins have also been improving during this time at a slight but steady rate as the company moved more of its customers to its subscription model and created more recurring revenue. As of right now, more than 80% of the company's total revenues ($1.9 billion out of $2.3 billion to be exact) come from recurring revenues as in subscription fees that get paid year after year.
The company's newly improved margins look better than not only its historical data but also its current peers. The company's gross margin of 68% is significantly better than the sector median of 49%, while its EBIT margin of 17% and EBITDA margin of 25% are both significantly better than sector medians of 4.92% and 9.42%, respectively. The company's net income margin of 14% leaves its competition in the dust as compared to the sector median of 2%. As a matter of fact, many small-cap cloud companies don't even have positive margins to speak of because they sacrifice profitability for growth so a lot of them are actually posting losses year after year. NICE's return on common equity came impressively at double digits while the sector median is close to 2% in this metric.
If this company is more profitable than its rapidly growing but profitless peers, its growth rate must be much smaller, right? Well, it isn't so. The company boosts profitable growth and its growth rates are also above average in almost every metric. The company's trailing revenue growth of 9% is above the sector median of 6% and its forward revenue growth of 11% is also above the sector median of 8%. I particularly like the company's EPS growth which came at 33% last year and it is expected to grow another 15% this year as opposed to sector median which is in single digits for both trailing and forward numbers.
Unfortunately, this all comes at a relatively high price because the company's valuation metrics show that while it's not excruciatingly expensive it is not particularly cheap either. Many people might say that if the company has better profits and better growth than its peers then it is only fair that it also enjoys a high valuation. Others might disagree and say that its current price might reflect a lot of future success that may or may not happen. Currently, the company's non-GAAP metrics don't look too bad with a trailing P/E of 23 and forward P/E of 22 but when we look at GAAP figures both P/Es climb to high 30s, in fact almost touching 40. The company's PEG ratio of 1.17 is slightly above the sector median but it still tells me that the company is not getting too much credit for its forward growth. Typically PEG ratios become dangerously high if they are above 2.5 or so and anything within the ballpark of 1 is considered fair. Investors might want to make their own judgment as to whether the company deserves this slight premium or not.
One thing I must add is that the company's current Price to Operating Cash flow comes at 23 which is not expensive at all when you consider the fact that it was able to quadruple its operating cash flow in the last 10 years. Also, the company's current Price to CFO ratio might seem a bit on the higher end of its 20-year range, but it's still on the lower end of its 5-year range which is when the company's transition to a SAAS company happened so it's probably a more fair comparison.
Moving forward, analysts are highly optimistic about this company. Interestingly, we have analyst estimates going all the way to 2032 for this company which is very rare for small cap companies, especially those headquartered outside of the US. While it is incredibly difficult to predict where a company's earnings will be several years from today, analysts seem to be confident that the company will be able to grow its EPS by anywhere from 10% to 20% in most years with average annual growth being around 15%. If the company can even come close to meeting this type of growth (which it has already been doing in recent years), its forward valuations no longer look expensive.
In the past, if the company has shown us anything it has shown that it is able to execute very well. The company's management likes the idea of profitable growth and using the company's own profits to fuel further growth. This also means that the company has very low debt levels. The company was debt-free for so many years but it took on some debt a few years ago but its cash flows can easily support the current debt level which stands at a ratio of 0.054 of its total equity.
In short, this is a company that's growing at an impressive rate while posting strong cash flow and profitability while keeping its debt levels low. In the future, I could even see this company being an acquisition target if it keeps this performance up for a few more years. The only concern I have regarding this stock is that it probably climbed too fast and reached a valuation that is slightly above average. I'd say it's definitely a "buy and hold" for most long-term investors but those more conservative investors might want to wait for a pullback or correction to get at cheaper levels. Another alternative approach is to buy a half position now (instead of the full position you were planning on) and wait for a better entry point to buy another half. That way you don't have to either miss out on a rally or run out of cash to buy the dip.
For further details see:
NICE Ltd.: Cloud Company With Actual Profitable Growth