Shedding Light On Alight: A Promising Company In A Turbulent Market

Introduction

Alright, let's address the elephant in the room. Alight, Inc. (NYSE:ALIT) IPO'd in 2021, following its merger with a firm supported by the SPAC (Special Purpose Acquisition Company) heavyweight, Bill Foley. We all know that SPACs have taken a hit in the US markets, and the plummeting value of stocks backed by SPAC "Kings" like Chamath Palihapitiya have hurt many investors. So, it's only natural that some may feel apprehensive about Alight's prospects. Then there is the global economic environment that looks pretty challenging, and it definitely poses a risk for investors. However, I think you should give this company a chance. In my opinion, Alight could still come through and achieve double-digit revenue and earnings growth in 2023.

Two Strengths

Alight offers cloud-based human resources and benefits administration services, including payroll, well-being, wealth, retirement benefits, integrated health, and all kinds of HR management solutions to some of the leading companies around the world. The Illinois-based company's flagship product is Alight Worklife which, as per the company, is "a high-tech employee engagement platform with a human touch - that brings together our mission-critical wellbeing solutions to our clients to drive better outcomes for organizations and individuals."

What I find particularly impressive about Alight is that it's not just another new kid on the block. With over 25 years of experience under its belt, Alight is a well-established company with a rock-solid customer base that spans over 100 countries. It holds a dominating position in its niche and boasts an impressive list of clients, which includes 70% of the Fortune 100 companies.

Alight continues to attract some of the top companies in the industry. In the previous quarter (4Q22), it added Chipotle Mexican Grill (CMG), General Electric (GE), Cintas Corp. (CTAS), and an unnamed Fortune 10 company to its client list. I think this is a testament to the quality of service that Alight provides, and why it's one of the most respected names in the HR and benefits administration services industry.

Alight seems to have mastered the art of customer acquisition, which has been a key driver of the company's impressive growth. In 2021, it developed a new logo team, dedicated to delivering BPaaS bookings, and the results have been good. Over the past two years, the company has won over 700 new logos, including big names like Shell (SHEL) and PwC. Alight initially set a goal of achieving BPaaS TCV bookings of between $900 million and $1 billion by 2023, but they've already made significant progress, ending last year with $871 million. This puts the company in a prime position to exceed its target, highlighting the strength of its product offerings and the effectiveness of its logo team in driving growth.

The second great thing that I like about Alight is its recurring revenue model. In 2022, 84% of Alight's revenues came from recurring revenue streams, with a remarkable 98% average revenue retention rate. The company typically offers its services to clients through contracts that span from three to five years, which provides a much-needed sense of stability to Alight's earnings. I believe this is especially valuable in today's turbulent and unpredictable economic landscape, where investors crave steady returns.

Financial Performance

While Alight doesn't have a lengthy financial history to draw from, the company has shown promising results so far. From what we've seen, Alight's financial performance has been decent, with noticeable improvements in its revenues, earnings, and cash flows. In my view, the company appears to be headed in the right direction.

Last month, Alight delivered its annual results for 2022 (first full year of operations since the IPO - link provided earlier) in which it reported a 7% increase in revenues to $3.1 billion on the back of 9% growth in recurring revenues and a 6% increase in adjusted EBITDA to $659 million. 87% of the revenues were related to the Employer Solutions segment, which includes earnings from its Alight Worklife platform, while 12% of the revenues came from the Professional Services segment which features project-based work.

The company ended the year with a GAAP net loss of $0.14 per share as opposed to a net loss of $0.08 per share a year earlier, but excluding the effects of one-off charges, the company earned an adjusted profit of $0.57 per share, up from $0.31 per share a year earlier. It generated $286 million in operated cash flows in 2022 versus $115 million a year before. The company's cash flow conversion rate (percentage of adjusted EBITDA converted into operating cash flows) was 43% in 2022.

Guidance Recap

Alight's management expects things to get much better in 2023 and has forecasted an improvement in all key metrics, including revenues, earnings, and cash flows. The company is expecting 11% to 12% growth in revenues in 2023 in the range of $3.47 billion to $3.51 billion. This double-digit growth rate for 2023 implies that the company's revenue growth will accelerate in 2023.

Moreover, earnings and profit margins are also forecasted to improve. The management expects the company's Adjusted EBITDA to rise by 12% to 14%, with margin expansion of 15 to 50 bps, to $735 million to $750 million. Adjusted earnings are predicted to grow by 9% to 18% to around $0.62 to $0.67 per share. Meanwhile, the operating cash flow conversion rate could climb to the range of 45% to 55%, with the growth in adjusted EBITDA and higher rate implying meaningfully higher levels of operating cash flows.

Looking Ahead

Despite Alight's promising growth prospects, there's no denying that the tough macroeconomic environment has emerged as a significant challenge for the company. This will certainly put its product offerings and growth capabilities to the test. It's crucial that investors carefully consider this risk factor before jumping in and buying Alight's shares.

The economic outlook is uncertain, with conflicting signals from different indicators. On one hand, the Commerce Department's recent report suggests that the US economy expanded at a slower pace than initially estimated in 4Q22, potentially indicating that the Federal Reserve's interest rate hikes are having a more significant impact than expected. On the other hand, inflation is proving to be stickier than anticipated, putting the Fed in a difficult position. Additional interest rate hikes to curb inflation will also further slow the economy and likely hurt corporate earnings.

Cost-cutting measures, such as mass layoffs, are already being implemented by companies in the US, particularly in the tech industry, and thousands of workers have lost their jobs. This is a concerning trend that raises questions about Alight's ability to grow its top and bottom line in the current economic climate.

If the economy does experience a slowdown or even enters into a technical recession in the coming quarters, it's unclear how severely this will impact both consumers and businesses. It's worth noting that inflation is a challenge faced by many countries globally, and central banks have taken action by tightening monetary policy. To bring down aggregate demand, central banks around the world are increasing interest rates, and this could have an impact on global economic growth which might slow down in 2023 compared to previous years.

This could pose a lot of problems for Alight. In the difficult global macroeconomic environment, the company might struggle to win new clients or sell new solutions to existing customers. This could potentially make it challenging for Alight to continue growing revenues, earnings, and cash flows. Alight's ability to generate recurring revenues, which has been one of its biggest strengths, may face challenges in 2023.

That being said, in my opinion, Alight appears to be well-positioned to weather this challenge. One thing to consider is that the company's growth has been driven, in part, by cost-cutting measures taken by its clients who outsourced their HR functions or wanted to get more bang for their buck on people investment. In the current economic climate, companies are going to be even more laser-focused on cutting costs and optimizing their returns on investments. This could give Alight a leg up and it might attract even more clients. So while there are definitely some challenges ahead, there is reason to be optimistic.

A closer look at some of Alight's achievements and its recurring revenues business model should instill more confidence among investors. To start with, the company entered this year from a position of strength, considering that it had $2.9 billion in revenues under contract for 2023. So it already has a solid foundation for growth.

Additionally, the company inked new deals last year, including the Alight Worklife BPaaS contracts, which should drive revenue growth in 2023. It's worth noting that Alight onboarded Federal Thrift last year, and 2023 will showcase the first full year of its services to its largest client ever, with more than six million participants. Plus, the recently closed acquisition of ReedGroup, an absence management provider, should help drive Alight's growth even further.

Conclusion

In my view, Alight seems to have a promising future ahead despite the challenging and uncertain economic environment. Its contracted revenues and the company's ability to attract top-tier clients provide a sense of stability in today's turbulent landscape.

Wall Street seems optimistic about the company's prospects, as evidenced by its shares rising almost 22% in the last six months, bucking the broader trend in the market where the S&P-500 has largely remained flat.

According to data from Seeking Alpha, the company currently appears reasonably valued, trading at 17.2x trailing twelve months earnings and 15.2x forward earnings estimates, as opposed to the sector median of around 17x. At this price, I would rate the stock as a hold, but suggest investors consider buying on weakness, particularly if there is evidence of the company continuing on its growth trajectory and winning new clients.