I have a long-term options play on an under-the-radar cloud transformation stock poised to take off in 2022. Alight
ALIT
, a leading human capital management enterprise that simplifies payrolls’ increasing complexities, provides cutting-edge AI-powered solutions for best-fit healthcare & retirement while integrating its client’s fragmented HR ecosystem.
ALIT works with companies across the world regardless of size, including 70% of Fortune 100 companies. Alight is undergoing the long and painful (but necessary) transition to the cloud, which has short-lived margin compressing side-effects but should result in unequaled long-term recurring revenue growth and visibility.
A recent study by Alight found that 40% of global enterprises will set in motion a digital payroll transformation project in the next 24 months, creating an enormous opportunity for this best-in-class HR cloud innovator.
Now is the time to jump on the ALIT train before the broader markets catch wind of this fantastic opportunity. Purchasing 6-month call options provides us with extensive exposure at a discounted cost.
The Trade
ALIT is currently trading at around $11.50, far below its intrinsic value, which I established to be roughly $20 a share utilizing a (conservative) comparable analysis by evaluating valuation multiples of its less-adapted competitors, ADP
ADP
& Paychex
PAYX
.
I am looking at some economical naked ALIT call options with a May 2022 expiration (5/20/22) at a $12.5 strike price. The call costs $1 today ($100 per 100 share contract) and would provide you with over $10K in exposure for less than $1K.
I chose this specific contract (exp. & strike) because it offers decent liquidity (relative to ALIT’s other options) and allows for two additional quarterly reports, giving investors/analysts a full year of public results to uncover this hidden gem.
The Catalyst
Superb forward-looking cloud-transformation progress from Alight (ALIT) in its 2nd ever quarterly report drove the stock up over 7% in its daily post-earnings action (11/9). However, ALIT’s jump allowed warrant holders to exercise their option-like derivatives at $11.50 (that exercise price of virtually every SPAC-related warrant), and early investors are taking some of their gains off the table.
The thinly traded nature of ALIT shares makes them vulnerable to sizable volatility. A sell signal has become ingrained in this under-the-radar stock whenever ALIT breaches $11.50, and the prevailing rally runs out of fuel. ALIT’s $11.50 warrant “strike” price coupled with relatively low daily volumes generates buying opportunities for us on every dip below that price.
ALIT warrants (ALIT/W or ALIT.WS) have been trading much more buoyantly than its underly stock since it debuted this past summer and are implying a future stock price of $14.65 ($11.50 strike + $3.15 cost of warrant).
ALIT keeps finding buyers at its latest $11.35 support level, and it’s only a matter of time before these liquidity-seeking sellers run out of ammunition and the stock heads back towards my $20 price target.
Final Thoughts
Alight is taking all the proper steps in its move to the cloud, with new product rollouts like improvement in its data & AI-powered Worklife platform, which now has a new mobile app that achieved 200k installs within 60 days of its launch. This unique application is expected to decrease its call center volume by 33%.
Alight’s Business Process as a Service (BPaaS) solutions, its cloud characterization, grew by 42% year-over-year and now makes up just over 14% of its total revenue. Management rose its Q4 guidance with its cloud transition going more fluid than the company initially projected.
This was ALIT’s second earnings report as a public company. I suspect that more analysts will distribute initiation of coverage reports on the stock with bullish outlooks that align with the company’s compelling growth narrative.
Happy Trading!
Dan
Equity Strategist & Editor of Zacks
Headline Trader Portfolio
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