Description

CoreCard (“CCRD”) is a well-managed provider of mission critical software for consumer lending and I believe its shares have 100%+ upside over the next 12-24 months as concerns about its largest customer (Goldman Sachs, “GS”) are worked out and the fate of GS’s credit card programs is decided. I believe the concerns around CCRD losing either or both GM and Apple credit card processing mandates are overblown because this kind of B2B software is very sticky, and among all competing solutions, CCRD has the most modern and cost-efficient solution. I have written up CCRD almost 3 years ago and its shares are down significantly since, yet I don’t believe much has fundamentally changed, barring GS abandoning its growth ambitions in the unsecured consumer credit space. Of course, it would have been preferable if GS had stayed on track, but given customer concentration, CCRD will be now more motivated than ever to diversify away from GS and grow through and with other clients. As and when CCRD onboards additional clients, its shares are likely going to be worth 3-4x current levels in a few years' time. I will not spend too much describing the business as I have written it up myself here and it has received two subsequent writeups since. I will provide an update of what has happened in the past 18 months and provide my outlook and forecasts for CCRD going forward. 

Situation Overview

In October 2022, despite taking significant losses, GS extended the Apple partnership to 2029. Yet in February 2023, GS revealed that it will look for strategic alternatives for its consumer lending platforms, which included Greensky as well as the GM and Apple credit cards. Greensky has since been sold at a significant discount to what GS paid for, GM is leading the charge in finding a new credit card issuer, and Apple is engaged with discussions with GS around the future of the Apple Card. This is the point of maximum uncertainty for CCRD as there is little clarity who the new issuers for the GM and Apple credit card programs will be, and most crucially for CCRD, whether the new issuer(s) will retain CCRD as the card issuing platform. I believe it’s worth diving into the issues that GS has had with the Apple Card to understand what went wrong so we evaluate what the future may look like.

What Went Wrong

I don’t want to overly speculate on the inner proceedings that led to GS’s ultimate decision but I think it’s worth clarifying a few points:

1. The Apple Card has been a tremendous success as a product,
2. Issues and complaints due to any issues with CoreCard’s software, and
3. Just switching the card issuer (or the card issuing software) will not make the problems inherent to the Apple Card go away.

The Apple Card has been an unallayed success, garnering ~15mn users and generating credit card receivables of ~$17bn within 5 years of its launch. GS has been investigated by the CFPB for its handling of customer complaints - but this was not due to faulty software but due to poor program design: among other things, because all Apple Card customers were set to receive their statements on the same day, instead of whenever they have initially set up their account, GS’s call centers were inundated with customer calls within few days of the month, resulting in long waits, poor customer experience, and high operating costs. Furthermore, the Apple Card is popular for a reason, namely its industry leading perks: no annual fees, no late fees, 2% outright cashback on anything (3% at select merchants) using ApplePay without caps or time limits, and comparatively low interest rates. It is no surprise that the traditional credit card issuers (JPM, C, SYF) all balked at the terms when Apple was originally looking for a partner, and GS suffered the winner’s curse, still struggling to turn a profit today.

Thus these $17bn of unprofitable credit card receivables became an albatross around GS’s neck, but the problem stems from the terms of the Apple Card, not the software underlying the Apple Card. Any potential acquirer is likely to insist on less generous terms (for Apple Card users). If Apple has to accept worse terms with third parties, it might just recut the existing deal with GS to be somewhat closer to market. However, Apple could also insist on performance of contract and bleed GS until 2029.

CoreCard’s Future

For CoreCard, GS abandoning its credit card ambitions means the following:

1. It cannot rely on GS for further growth via aggressive credit card program acquisitions or launches,
2. The GM and Apple Card may get a new issuing bank, and
3. It really needs to step up growth via new partners.

CoreCard has historically guided towards 20-25% annual revenue growth on a 5-year rolling basis, which was underpinned by GS’s ambitions in the credit card space. This is clearly not on the table anymore, with the question being whether CCRD will be able to maintain servicing the GM and Apple Cards. Based on my work, if the new card issuer was JPM, they are likely to transition this onto their in-house platform, but even with Amex, which also has a proprietary card issuing software, it is likely that there would be a long transition away from CCRD, if at all. In my mind, the biggest positive, if you will, is that CCRD is now a lot more focused on diversifying its revenues away from GS, which they frankly were a bit reluctant about in the past. Although it has been reassuring to see that CoreCard managed to transition the GM card from the legacy provider onto their own platform without hiccups, frankly, new / large clients are more likely to be launching new card programs on the CCRD platform as opposed to converting a large existing program onto the CCRD platform. There is always some hope in me that existing banks get religion to upgrade their legacy tech stack to modern platforms, but unfortunately for CCRD, there is a lot of inertia in the system. Let’s hope that in relation to the GM and Apple Card, the inertia is on CCRD’s side.

Even in 2019/2020, CCRD managed to achieve 30%+ EBIT margins, and I believe that is a conservative yardstick for the future. Right now, its cost structure can support two large conversion clients per year, which probably not happening in the near term, although I would love to be wrong about this. At 2023 revenue levels, 30% EBIT margins would imply $17mn EBIT, which would put this company at 5.1x EV / normalized EBIT, which is clearly highly attractive. As we learn the fate of the GM and Apple Card processing and CCRD otherwise finds ways to grow, I think the shares can rerate significantly. I would hate to see CCRD being sold, and most certainly if the bid was for less than $40 (which is like ~$300mn EV), but this could happen.

Disclaimers

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Catalyst

Annoncement of the new issuer for the GM card + whether they intend to keep using CCRD; announcement of the future for the Apple Card; potential sale.