On Thursday, Stephens, a financial services firm, increased the price target for i3 Verticals (NASDAQ:IIIV) to $29.00, up from the previous target of $27.00, while maintaining an Overweight rating on the stock.
The adjustment follows the successful sale of i3 Verticals' Merchant Services segment to Payroc, a private payment provider, for $440 million. This transaction was valued at approximately 11 times the segment's earnings, including 25% corporate overhead and $4 million in non-core assets, surpassing Stephens' initial valuation estimates of 9 to 10 times earnings.
The initial announcement of the intent to sell this division was made in February, and the completion of the deal has alleviated concerns regarding the potential for the sale not to proceed or to be finalized at a lower valuation range of 5 to 7 times earnings. The sale's completion is anticipated to have a favorable impact on i3 Verticals' shares.
As a result of the sale, i3 Verticals is expected to clear nearly all, if not the entirety, of its debt, which is estimated to be around $369 million. This significant reduction of debt will enhance the company's financial flexibility, allowing it to pursue mergers and acquisitions, with a focus on larger targets valued at over $5 million.
Looking forward, Stephens anticipates that i3 Verticals will experience high single-digit revenue growth from its remaining operations, which will have a composition of 75% software and 25% payments, with profit margins in the low 30s percentile.
The price target has been raised based on an 11 times multiple of the projected fiscal year 2025 adjusted EBITDA. Stephens also notes that the scaling of i3 Verticals' platform through strategic mergers and acquisitions could catalyze further multiple expansion.
In other recent news, i3 Verticals has been garnering attention due to its Q2 earnings and revenue results. The company's fiscal second quarter 2024 results slightly missed expectations, leading to a downward revision of its full-year 2024 guidance for the second consecutive quarter. BMO Capital Markets responded by reducing the price target for i3 Verticals from $25.00 to $24.00, while maintaining a Market Perform rating on the stock.
The company reported a minor increase in Q2 revenues, which reached $94.5 million, and a robust balance sheet. The revised FY24 outlook estimates revenues between $380 million and $394 million, and adjusted EBITDA between $107 million and $113 million.
These are recent developments that highlight i3 Verticals' strategic focus on expanding software solutions in key vertical markets such as the public sector, healthcare, and education.
InvestingPro Insights
Following Stephens' optimistic outlook on i3 Verticals (NASDAQ:IIIV), InvestingPro data shows a market capitalization of $659.4 million USD, indicating a notable presence in its sector. The company's P/E ratio stands at a high 193.73, which may raise questions about valuation for potential investors. However, when adjusted for the last twelve months as of Q2 2024, the P/E ratio comes down to 54.44, suggesting that earnings are expected to grow, aligning with one of the InvestingPro Tips that net income is anticipated to grow this year.
Despite the high P/E ratio, the company's revenue has grown by 9.02% during the same period, which could be a sign of underlying business strength. Additionally, analysts predict the company will be profitable this year, which is supported by a solid gross profit margin of 77.93% for the last twelve months as of Q2 2024. These metrics may provide confidence to investors looking at the long-term potential of i3 Verticals, especially considering the recent divestiture and debt reduction strategies.
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