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Compass Point has initiated coverage on Q2 Holdings (NYSE: NYSE:QTWO), a provider of digital banking solutions, with a Buy rating and a 12-month price target of $91.
This represents approximately a 20% upside from the current valuation, driven by anticipated revenue growth and multiple expansions in the enterprise value to revenue (EV/R) next twelve months (NTM).
The firm forecasts Q2 Holdings' "core" revenue and adjusted EBITDA for fiscal years 2024 and 2025 to reach $692 million and $776 million, and $117 million and $158 million, respectively.
The company's revenue base is noted for having around 76% recurring revenue, which is expected to increase as a percentage of total revenue. Compass Point highlights Q2 Holdings' potential for growth and market share capture, with year-over-year "core" revenue growth projected at 10.7% for 2024 and 12.1% for 2025, surpassing the industry average of roughly 5%.
The analyst's investment thesis for Q2 Holdings includes not only an acceleration in year-over-year "core" revenue growth but also a continuous improvement in adjusted EBITDA margins, predicted to enhance by 300 to 400 basis points annually.
These positive trends are anticipated to contribute to an approximate 1x expansion in the EV/R NTM multiple.
Q2 Holdings' stock performance has been robust, with a year-to-date increase of approximately 74%, reflecting investor recognition of the company's business momentum.
The firm expects Q2 Holdings to outperform consensus estimates and continue its growth trajectory through effective monetization, user base expansion, and the benefits of cross-selling and scaling.
However, Compass Point also acknowledges potential risks to their outlook, including a deceleration in the growth of remaining performance obligations (RPO), a more significant downturn in non-subscription revenue than modeled, and the possibility of adjusted EBITDA margin expansion occurring sooner in 2024 rather than 2025.
In other recent news, Q2 Holdings has been the subject of significant attention from various analyst firms. BTIG raised its stock target for the company to $82, citing key growth initiatives and a positive shift in business operations.
Truist Securities and RBC Capital Markets also raised their targets to $78 and $76 respectively, based on robust Q2 results and a positive shift towards higher recurring revenue growth. However, DA Davidson downgraded the stock from Buy to Neutral, while raising the price target to $76, reflecting the company's significant growth.
Q2 Holdings reported substantial gains in revenue, EBITDA, and free cash flow in Q2, surpassing expectations. This strong performance was attributed to the securing of six new Tier 1 deals and a substantial renewal and expansion with a top-10 Helix customer. These developments indicate a positive shift towards higher recurring revenue growth for Q2 Holdings.
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