Summary
- CoreCard is a highly profitable small-cap undergoing massive growth.
- Thanks to two decades of research and development, CoreCard's product now speaks for itself with minimal marketing.
- Even aggressive growth assumptions may ultimately prove too low.
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Investment Thesis
Despite large growth potential within the rapidly expanding financial technology industry, the market is not pricing in growth past the current decade. The market is seeing Intelligent Systems' (NYSEMKT:INS) partnership with Goldman Sachs (NYSE:GS) as a one-off event, but I disagree. After combing through the breakdown of CoreCard's operation for the past two decades, it is clear the current growth and success was prepped by the late 2000s. Similarly, the investments and relationships being built today are setting up the implementation of additional large clients. There seems to be excessive discounting of future growth due to lumpy quarterly results, but revenues will soon smooth over quarter to quarter, and the market will reward this with multiple expansion. Despite faster growth, higher profitability, no debt, and a cash hoard equivalent to 10% of its market cap, INS trades at a lower valuation multiple than their peers.
Company and Industry Overview
The payment solutions industry is dominated by Global Payments (GPN), Fidelity National Information Services (FIS), and Fiserv (FISV). These companies provide a wide range of integrated solutions across the transaction chain. Despite being 100x smaller, Intelligent Systems Corporation competes with some of their service segments through its primary holding, CoreCard.
CoreCard's offering is focused on a very specific segment of the payment ecosystem: software solutions for managing any type of credit/debit program or records system. Unlike many other financial services corporations, CoreCard does not underwrite credit themselves. They enable other corporations to build out their own credit line. As a result, INS itself is not subject to the many banking and financial services regulations other financial service providers face. Rather, they must make sure the CoreCard software allows their clients to be compliant. This makes the integrated FinTech giants a poor comparison as they do much more than providing issuing services, but I have yet to find a publicly traded pure play on a comprehensive 'system of records' software in this industry. This may be partially explained by the CEO's comments in the Q3 2019 earnings call:
We are laser focused today on building a solid infrastructure to enable CoreCard to eventually take on the very largest clients that the giants in the industry currently serve...
One of our advantages is our ability to add new functionality rapidly... different functionality places different stresses on the operating infrastructure components such as database hits or CPU utilization. It also often requires substantial rewriting [of] the reports. I bring this up just to emphasize what I've stated before this is a very, very complex software undertaking, which is why there have been a very few new entrants in the open loop credit card space in the past 20 years.
I should add here, however, that I do expect new competition. Many of the prepaid card processers are spending large sums to get into the credit game. They would definitely eventually get there, but their early customers can expect some really, really rugged periods as they find it is a magnitude perhaps times 10 more difficult than prepaid. What you don't know, you don't know.
There seem to be four aspects to CoreCard that make it unique when combined:
- Speed to market
- Customizability
- Lower cost and scalability
- Transition to in-house through licensing
Alliance Data Systems (NYSE:ADS) is the closest publicly traded comparable I've identified, but ADS derives a significant portion of their revenue from financing fees and is focused on loyalty programs.
