Online banking software maker Corillian (Nasdaq: CORI ) bills itself as "the top provider of online banking solutions to leading financial institutions." I don't know whether the company deserves that title, but Corillian's write-up in today's Wall Street Journal is certainly impressive.
According to the Journal, and to a press release put out by Corillian yesterday, the new Corillian Fraud Detection System actively monitors the Internet for signs of phishing attacks before they take place. On the prevention front, Corillian's software searches for evidence of spoofed bank websites being created, and for test runs of phishing emails being prepared and mailed. And in case an attack gets under way despite these measures, the software also keeps an eye out for evidence of personal account information being collected, verified, and used in a suspicious manner.
Corillian's product could not have arrived at a better time. In all likelihood, a fair number of Fool readers will have read the Journal article on Corillian this morning and will be thinking to themselves: "Gee, could this be a small-cap Hidden Gem in the making?" Well, let's apply the 7 Steps for giving potential gems a quick lookover and see how Corillian fares.
Corillian's $220 million market cap makes it a definitive small cap.
Historical and projected earnings growth
Historically, the company has been a money loser, but it recently achieved positive generally accepted accounting principles earnings and positive free cash flow. Like competing software makers serving the banking industry -- for example, Online Resources (Nasdaq: ORCC ) , Digital Insight (Nasdaq: DGIN ) , or Motley Fool Hidden Gems recommendation Pegasystems (Nasdaq: PEGA ) -- Corillian is projected to post quick earnings growth in the future (20% per year over the next five years).
Based on its projected earnings growth, Corillian is priced at a 40% premium to our desired EV/FCF/G ratio of 1.0 or less.
Return on equity
Corillian's return on equity, on the other hand, is phenomenal: 43%. An aggressive investor might prefer to evaluate Corillian on the resulting EV/FCF/ROE ratio of 0.65.
Corillian has a dark past of rapid share dilution, but over the past two years, dilution has slowed markedly. At roughly 4.5% per year, the company is no longer in the same league with serial diluters such as Intel (Nasdaq: INTC ) , Oracle (Nasdaq: ORCL ) , or McAfee (NYSE: MFE ) .
Corillian is not at all your standard value investment. Everything -- and I mean everything -- has to work out exactly as planned for this company to be worth buying at the current valuation. That means Corillian needs to maintain its astounding level of return on investment; its growth rate must accelerate even faster than analysts expect; and banks must travel from far and wide, bearing bags of cash, begging to purchase Corillian's new anti-phishing software. Buying at this valuation requires a leap of faith that all those things will come to pass.