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BM Technologies: Deep Value Turnaround

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Letโ€™s take a closer look at BM Technologies (NYSE:BMTX), a company that is often overlooked due to its limited coverage and short trading history. BMTX is a fintech company that plays a crucial role in facilitating deposits and banking services for customers through its partnerships with banks.

BMTX operates in two main segments: higher education and Banking as a Service (BaaS). In the higher education segment, BMTX powers college-branded bank accounts and facilitates student aid disbursement, supporting around 70% of all college-branded bank accounts and debit cards. The deposits are held by First Carolina Bank (FCB), with the transfer expected to be completed within the next three months. In the BaaS segment, BMTX collaborates with Customers Bank (CUBI) to provide the banking platform for T-Mobile (TMUS) known as T-Mobile Money.

BMTX generates revenue through various channels, including deposit servicing fees, interchange fees on debit spend, account fees, and university subscription fees. As of Q2, BMTX had serviced an average of $1 billion in deposits and facilitated $2.8 billion in debit transactions over the past year.

The Value Proposition of BMTX

There are five key drivers that contribute to BMTXโ€™s earnings power:

  1. FCB Post-Transfer Economics: Following the completion of the deposit transfer, BMTXโ€™s earnings will receive an immediate boost. The deposit service fee take rate will increase from around 3% to 4.5% due to a variable rate servicing fee structure. In addition, FCBโ€™s Durbin Exemption status will raise the net interchange take rate on debit transactions from approximately 45 bps to 85 bps. These changes are expected to add $9 million in incremental EBITDA.
  2. Stabilizing Deposit Base: BMTX has faced a decline in deposits since the beginning of 2022, primarily due to stimulus checks and rate-sensitive deposits leaving as the Fed increased rates. However, the company believes that BaaS accounts are now stabilizing, offering a more normalized deposit base and improved cash flow stability.
  3. Affordable CAC at Universities: BMTXโ€™s focus on higher education growth presents a cost-effective approach to increasing deposits. By tapping into the student bodies at the colleges it serves, BMTX can attract new accounts at a low cost. With current student usage rates at around 10-15%, the growth potential is substantial.
  4. Leveraging Operating Costs: BMTX has strategically managed its largest cost line item, primarily related to technology, communication, and processing. As the business matures, the company expects a significant reduction in this expense as a percentage of revenue, leading to improved operating leverage. BMTXโ€™s profit enhancement plan (PEP) is projected to save $18 million in annualized costs by early 2024.
  5. New BaaS Partnerships: BMTXโ€™s partnership with T-Mobile not only provides earnings for the next two years but also acts as a stepping stone for potential new BaaS partnerships. If BMTX can secure another well-known brand for marketing collaboration, it would immediately boost earnings and margins while reducing uncertainty.

Potential Risks

While BMTX presents promising opportunities, itโ€™s important to consider the potential risks involved:

  1. Macroeconomic Factors: BMTXโ€™s core business can be influenced by macro conditions and regulatory changes within the banking sector. Factors such as rising interest rates and inflation can impact deposits and debit spend, affecting BMTXโ€™s revenue. Additionally, the stock price may be influenced by broader market trends and industry downturns.
  2. Trading Mechanics: BMTXโ€™s average daily trading volume can limit institutional trading due to potential slippage. This could delay the marketโ€™s recognition of the investment opportunity. However, BMTXโ€™s management is actively promoting the company to potential shareholders, which could mitigate this risk.
  3. Bank Transfer: While the transfer of higher education deposits from CUBI to FCB is expected to be completed by the end of the year, there is a slight possibility of delays or cancellation, which could impact the economics and cash flow.
  4. Regulatory Changes: Changes in regulations regarding higher education banking and Durbin Exemptions could pose risks to BMTXโ€™s future earnings. While management is confident in their compliance efforts, it is prudent to consider potential impacts on account fees and other revenue streams.

Financial Highlights

Enterprise Value

Enterprise Value

Model Highlights

Model Highlights

Model Assumptions: FCB transfer completion by mid-Q4 โ€™23, $18 million in profit enhancement plan savings by โ€™24, less than 3% annual growth in deposits and debit spend, $4 million CAPEX, and $3 million cash in Q3 โ€™23 for a tax receivable. Management expects positive Core EBITDA in the second half of โ€™23.

Valuation

Absolute Basis

Under the assumption of stabilized deposits, successful FCB transfer, and completed profit enhancement plan in 2024, BMTX demonstrates significant potential with a normalized EV/FCF ratio of 0.93x (108% earnings yield).

Relative Basis

Given the limited trading history, it is challenging to find direct comparable companies for relative valuation. However, it is worth noting that BMTXโ€™s unique position in the market and its valuable partnerships contribute to its attractive potential.

Margin of Safety

BMTX offers several sources of downside protection, creating a margin of safety for investors:

  1. Cash: BMTX maintains a healthy cash balance, providing security for investors. With approximately $0.97 per share in cash and an expected increase to $1.58 by the end of 2024, the cash reserves significantly mitigate downside risks.
  2. Assets: BMTX possesses valuable assets, including proprietary technology and the significant amount of deposits it services. These assets present additional protection, especially in a worst-case scenario or during a potential acquisition.
  3. Strategic Importance: BMTXโ€™s pivotal role in the college-branded banking landscape positions it as a vital player. With a high market share in this sector and its expertise in student aid disbursement, BMTX offers stability and long-term viability.

Shareholder Base/Insider Transactions

BMTXโ€™s shareholder base consists of a mix of public investors and insiders. Notable shareholders include Vanguard and Pacific Ridge Capital Partners. Insider transactions have been limited due to their access to material non-public information. However, management has expressed a belief in the undervaluation of the stock, potentially leading to future insider purchases.

Management

BMTX is led by a capable management team with a clear focus on value creation and long-term growth:

Luvleen Sidhu [CEO]: With a background in founding BMTX and a strong understanding of the industry, Luvleen is instrumental in executing the companyโ€™s strategy and nurturing relationships with partners.

Jamie Donahue [President & CTO]: As an experienced technology professional, Jamie brings valuable expertise to BMTXโ€™s operations, especially in cloud architecture and engineering.

Jim Dullinger [CFO]: Jimโ€™s financial acumen and focus on efficiency make him a valuable asset to the management team. His dedication to long-term value creation aligns with the companyโ€™s goals.

In Summary

BMTX represents an extraordinary investment opportunity. With its essential position in the college banking landscape, strong partnerships, and robust margin of safety, the company offers the potential for significant shareholder returns. By considering the key drivers and risks, investors can make informed decisions about investing in BMTX.

Note: This article discusses microcap stocks and the risks associated with them. Please exercise caution when investing in such stocks.

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