A fresh cloud software business is about to hit the public market via special purpose acquisition company or SPAC for short.
It’s worth getting our feet wet in this high-risk/high-return public issuing region of the market. Leading HR cloud provider, Alight Solutions, will be taking its shares public through a merger with the ‘blank check’ company, Foley Trasimene Acquisition Corp.
WPF
, for an enterprise value of $7.3 billion.
SPACs have been the hottest new way to bring private businesses public, with traditional IPO’s taking a back seat in the speed-driven digital era of the markets as businesses rush to enter the equity market at a record pace before the euphoria ends. I think it is time that we jump on board this SPAC space shuttle that is taking some companies to the moon.
The buying opportunity in Alight’s pre-merger SPAC
WPF
may be too good to pass up at its current price level. WPF is poised to soar, with the risk-appetite for fresh public companies standing at a 2 decade high.
The Business
70% of the Fortune 100 and 14% of the US working population are Alight clients, not to mention enterprises across more than 100 different countries. Its cloud solutions give businesses scalable software for growing operations to help them navigate the increasingly complex and expensive healthcare system as well as ensure employees’ financial stability.
Alight is a next-generation cloud software provider that enhances human capital and business solutions through its data and IA-driven software. The enterprise is rapidly developing its business process as a service (BPaaS) platform. Alight is building out its BPaaS platforms, which will include the Wealth Cloud, the Health Cloud, the Payroll Cloud with annual revenue growth expectations in the high-single-digits, with the hopes that 50% of its revenue will come from BPaaS by 2023 (currently only 13%).
The Buy Catalyst
Despite Alight’s present transformational stage, its revenue stability and visibility are almost unparalleled in the software sector, with contracts lengths of 3-5 years. 97% revenue retention rate and 81% of 2021’s revenue derived from recurring obligations.
This type of contract/subscription-driven predictability excites analysts like me, especially at this reasonable valuation.
Based on the ownership breakdown presented in the recent investor presentation shown below, the company is being given a market value of $7.4 billion (this figure is based on the market cap of WPF divided by its portion of the company, 19.2%).
This valuation puts WPF’s post-merger price to sales at 2.5x, which is quite sensible for a business that is poised to accelerate its top & bottom-line. Alight’s P/S represents a significant discount to the broader cloud software market, with many of these stocks trading at high double-digit P/S ratios. Its primary comparables include Broadridge
BR
, Paychex
PAYX
, and ADP
ADP
. Each are trading at a premium and don’t have the substantial growth outlook figures as the digitally leveraged Alight.
Management is projecting high-single-digit topline growth in the short-term and 10%+ growth combined with expanding margins in the long-term as its cloud business takes off.
Alight is in the midst of a digitally inclined transformation, and this SPAC’s current pricing is conservative, to say the least when considering its long-term potential. They are giving WPF shares away at their current price and I would not hesitate to start a small position in this ‘value’ oriented SPAC opportunity.
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