Is Q2 Holdings a Buy Near All-Time Highs?

Q2 Holdings (QTWO -2.31%) released better-than-expected first-quarter 2019 results earlier this month, setting a new high mark for quarterly bookings, showcasing the fruits of recent acquisitions, and highlighting the sustained momentum of its core digital-banking platform. Though shares of Q2 Holdings initially pulled back modestly in response, they've since all but recovered to trade within 2% of their all-time highs as of this writing.

That raises the question: Is Q2 stock worth buying and holding today? Let's dig deeper into its start to the new year to find out.

IMAGE SOURCE: GETTY IMAGES

Q2 Holdings results: The raw numbers

DATA SOURCE: Q2 HOLDINGS. GAAP = generally accepted accounting principles. 

What happened with Q2 Holdings this quarter?

• By comparison, revenue arrived above the high end of Q2's guidance provided in February for a range of $70 million to $71 million.
• On an adjusted (non-GAAP) basis, quick excludes items like stock-based compensation and acquisition costs, Q2's net loss was $2.3 million, or $0.05 per share, compared to net income of $0.06 per share in the same year-ago period. Most analysts were looking for a slightly narrower net loss of $0.04 per share.
• Adjusted EBITDA declined to $0.3 million from $5.0 million in the same year-ago period -- technically below guidance for a range of $1.2 million to $1.8 million. But the drop was driven by a combination of timing of payroll taxes on equity incentives and, to a greater extent, investments in its recently closed acquisitions of lending and leading platform company Cloud Lending, and digital sales and onboarding specialist Gro.
• Registered Q2 platform users grew 19% year over year and 2% sequentially from last quarter to 13.1 million.
• Notable new contracts included:
  • A Q2 Open deal using the Q2 digital banking platform as the front end for a direct bank initiative at a $5 billion financial institution,
  • A digital onboarding contract using Gro with a new $8 billion bank in the Northeast -- representing Gro's single largest contract to date.
  • A digital banking contract with a $10 billion bank in the Northeast.
  • A digital lending agreement with a $1 billion bank in Texas (and current Q2 platform customer) to utilize Cloud Lending's platform.

What management had to say

Q2 Holdings CEO Matt Flake stated:

We had a strong start to the year in the first quarter, particularly on the sales side of the business. We achieved record bookings for a first quarter, powered by a broad mix of deals that included our newly acquired Gro and Cloud Lending products in multiple combinations. We also continued our sales execution on the digital banking side, with a balanced performance across bank and credit union markets. With our current pipeline and newly expanded product portfolio, I'm as optimistic as ever about the opportunity ahead of us through 2019 and beyond.

Looking ahead

For the second quarter of 2019, Q2 sees revenue arriving in the range of $75.5 million to $76.5 million, good for year-over-year growth of 29% to 31%, with adjusted EBITDA ranging from $2.7 million to $3.3 million. 

As such, for the full year of 2019, Q2 increased its outlook to call for revenue of $308.8 million to $311.8 million (up from $305 million to $309 million previously), good for growth of 28% to 29% from 2018. Q2 simultaneously reiterated its outlook for 2019 adjusted EBITDA of $20 million to $22 million -- indicating the company expects a particularly strong second half as its strategic investments in acquired businesses begin to wane.

Where does that leave investors today?

It might be tempting to avoid Q2 right now with shares trading hands at a whopping 162 times this year's expected earnings and nearly 13 times trailing 12-month sales. But the former also measures from a minuscule adjusted-earnings base as Q2 edges into the black this year. Further, as management noted during their annual Investor Day a few months ago, the combination of Q2's expanded product portfolio (both through acquisitions and organic innovation), as well as cross-selling opportunities as demonstrated in the Gro contract signed this quarter, has effectively increased its total addressable market to $8 billion today. Assuming it can sustain its momentum and grab a meaningful piece of that pie -- and as long as the company isn't acquired before then -- that leaves Q2 Holdings with an enviable runway for growth from its aforementioned 2019 revenue guidance. 

So with the caveat that it almost certainly won't be a straight line upward, I think patient, long-term shareholders would do well to consider buying Q2 stock today.