Why Did David Einhorn Buy Alight Stock?

When David Einhorn took a stake in Alight (NYSE:ALIT), it took a lot of investors buy surprise. Not only did he make a splash by snapping up shares but he did so in a big way, betting around $78 million which represented 3.8% of his portfolio.

What is it about this cloud-based human capital firm that aims to improve employee well-being that earned Einhorn’s conviction?

What Sets Alight Apart?

Alight has set itself apart in the marketplace by leveraging both artificial intelligence and machine learning to simplify HR and financial processes.

Using AI, Alight analyzes vast datasets and allows businesses to forecast trends as well as to identify potential issues before they escalate.

It’s also figured out how to create technology that improves user experiences through intuitive interfaces and automated workflows in order to reduce manual efforts and errors.

For end customers, these enhancements translate to improved operational efficiency, cost savings, and the ability to allocate resources to more strategic initiatives.

That means businesses can uncover optimization opportunities across workforce management, benefits administration, and financial planning, which all combines to result in a competitive advantage, or moat.

Alight Is A Global Firm

When you stand back and examine some of the largest companies in the world from Apple to Meta, and from Alphabet to Netflix, you see one common thread, the ability to go global fast.

Alight is increasingly earning a reputation as an international operator by growing beyond the U.S. into international markets. The company is tapping into a burgeoning demand for HR and financial digital transformation services.

In a sense, Alight is enjoying a Blue Ocean opportunity by accessing an untapped client base that is increasingly recognizing the value of digitizing HR and financial processes to drive efficiency.

Like the successful tech giants that have come before it, Alight’s foray into these markets is characterized by a tailored approach that addresses cultural nuances, and specific business needs, necessary conditions for relevancy in new markets.

Strong Client Retention Rates

If Warren Buffett’s old adage to delight customers was applied to Alight, it’s clear the company is succeeding thanks to impressive client retention rates that reveal the satisfaction it delivers to its customers.

High retention rates are a key performance indicator that reflect how well a company is meeting and exceeding client expectations. It’s much easier for a company with a great product to keep existing customers satisfied than to win new business and clearly Alight is succeeding on that front through its suite of solutions that are not only competitive but also deeply integrated into its clients’ operations.

The advantage of burrowing itself into a client’s business is that Alight becomes an indispensable part of their overall workflows, and competitors cannot easily encroach on their business.

A further domino effect from this approach is stable and recurring revenue streams, which in turn fuel further innovation, market expansion, and service enhancement.

For prospective clients, the existing high retention rates signify operational excellence and market relevance, both essential indicators of the firm’s potential for sustained growth and profitability.

Alight Financials

The top line at Alight isn’t going to light the world on fire with growth rates but they are steadily growing, and that’s proven enough to attract Einhorn’s attention.

Here is what the past few fiscal years look like in terms of revenue growth:

  • 2018: 3.3%
  • 2019: 7.3%
  • 2020: 6.9%
  • 2021: 6.9%
  • 2022: 7.4%

The company has also been largely profitable in recent years with EBIT of $307 million in 2018 and generally nine figures of profitability have been reported in recent years with 2022 being the exception where the number swung negative to the tune of $14 million.

Nonetheless, the all-important levered free cash flows have been substantially positive, and even in 2022 they came in at $138 million.

So too has cash continued to look attractive on the balance sheet with $250 million as of the most recent fiscal year, though it must be noted that debt levels are pretty substantial and sit at $2.7 billion now.

Clearly, Alight is no secret in the investing world. It’s already a $5.3 billion company and ALIT share price has risen from around $6.50 per share to almost $10 per share since October 2023.

Why Did David Einhorn Buy Alight?

David Einhorn likely bought Alight stock because of its stable revenue growth and 25.4% upside to fair value of $12.22 per share.

It should be noted that sentiment has shifted moderately bearish on Alight recently with two of the nine analysts who cover the stock downgrading earnings forecasts for the coming quarter.

Still, they expect that the interruption to profitability over the past year will be rectified this coming year with a resumption to reporting a bottom line in the black once again.

With $3.3 billion in top line revenue and a 5.9% forecasted revenue CAGR over the next 5 years, the future appears to be bright for Alight shareholders.

It’s not all roses though with the firm’s return on invested capital sitting at 0.4% and return on equity coming in at -5.6%.

Is Alight Stock a Buy?

Alight stock has a great deal going for it including a stable business model with strong revenue growth and high customer retention rates.

In spite of the significant run in share price over the past four months, the stock remains undervalued according to the consensus of 9 analysts, who collectively forecast over 25% upside from present levels.

It’s clear that the stickiness of the solution is sufficiently high to ensure that customers, once onboarded, tend to find it hard to leave and that’s likely a big reason why Einhorn’s Greenlight Capital has been willing to take such a large position. Already the stake appears to be well in the money and now the question is how high the stock will go from here? If analysts are to be believed there is still another few dollars per share left in the fuel tank.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.