Friday, March 19, 2021

A Small Cap Equity holding: Q2 Holdings, Inc. (QTWO, $135.35): “Building Castles with the Cloud” by: Natalie Frey, AIM Student at Marquette University

 Q2 Holdings, Inc. (QTWO, $135.35): “Building Castles with the Cloud”

By: Natalie Frey, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


• Q2 Holdings, Inc. (NYSE:QTWO) provides cloud-based digital banking products and services through their SaaS (software as a service) platform. The firm primarily serves small-midsized financial institutions and fintech firms. 

• The Austin FC club of Major League Soccer announced in late January 2021 that it had entered a naming rights partnership with Q2 for their $260 million stadium. The 20,500 + seat stadium is now known as “Q2 Stadium.” 

• Revenues grew by about 27.7% from 2019 to 2020 for the full year, but the firm’s EBIT endured negative growth of -66.9% due to large spikes in COGS and SG&A expenses throughout 2020.

• The company announced the immediate launch of a cloud-based PPP (paycheck protection program) solution at the end of 2020, offering lenders substantially increased processing capacity.

• Autobooks became the first fintech to use Q2’s Partner Marketplace in January 2021 – a product that allows financial institutions to partner with and offer innovative fintech solutions to their existing account holders.

Key points: Q2 Holdings Inc. remains in-play. Following the release of Q2’s 10-k report for 2020, numerous analysts boosted their target price for the firm from an average of ~$120/share to ~$150/share, showing a consensus that further growth is expected in coming periods. 

The firm illustrated growth in their user per customer count, which now stands at approximately 40,000 users per customer as their tier-1 customer base expands. Additionally, the net revenue retention rate for Q2 was maintained in 2020 despite unprecedented circumstances. The growth in tier-1 customers and the retention of recurring revenue streams indicate continued momentum for Q2 Holdings.

At the end of 2020, Q2 announced the immediate launch of a PPP solution that combined the power of various existing applications to provide banks with the ability to originate and forgive loans with drastically increased processing capacity. The pandemic relief packages and programs drove the need for lenders to improve their ability to originate, forgive, and process large amounts of loans all from a single system. The urgency with which this solution was launched and implemented proves the firm’s ability to recognize and react to evolving needs of their customers.

In 2021, Q2’s Partner Marketplace product was launched for the first time by Autobooks, a fintech that provides small business banking solutions through a digital platform. This solution aims to connect financial institutions and fintechs, offering banks the ability to deploy desirable fintech products directly to their account holders. The launch of this platform presents great potential for cross-selling, as regional and community banks continue to face pressure to adopt the fintech offerings that are demanded by today’s consumer.

What has the stock done lately?

Following the launch of their cloud-based PPP solution in December 2020 and the launch of Partner Marketplace in January 2021, Q2’s stock is up 19.34%. This growth can be attributed to the emphasis on continuing innovation while tending to the immediate needs of their customers throughout the COVID-19 pandemic. The stock price has also maintained stability and has proven to be less volatile in the past three months than 75% of US stocks which have a typical weekly movement of +/- 4%.  

Past Year Performance: Over the past year, QTWO has achieved a return of 62.2% which exceeds the US software average return of 45.7%. Since the stock was added to the AIM portfolio, Q2’s share price has exceeded the original target price by 13.9% and provided a return of 41.9% since its addition. 

Source: FactSet

My Takeaway

Q2 has been able to both manage and capitalize on the obstacles presented by the pandemic, and this expectation-exceeding performance has been reflected in increased valuations within the investment community. Although gross margin for 2020 came in below former projections, the company’s strategic product positioning and focus on quickly delivering solutions needed by customers is anticipated to propel further growth in future periods. Based on the agility and efficiency demonstrated in the recent year, Q2 Holdings painted a promising picture of what the future holds for this cloud-based tech company. 

Source: FactSet