The views expressed below are those of Anchor Capital Advisors, LLC (‘‘Anchor’’) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.
Red Violet Inc. provides cloud-based mission-critical analytics and information solutions to enterprises.[i] The company specializes in fraud detection, risk mitigation, and marketing.[ii] The two biggest products are idiCORE with 4,000 customers, and Forewarn, with 15,400 users.[iii] Red Violet spun out of Fluent in March 2018.[iv]
idiCORE is an investigative solution for due diligence, risk mitigation, compliance, and authentication for a number of industries. IDI sells to financial services, insurance, healthcare companies, law enforcement, and government. Forewarn is an app that provides instant knowledge prior to face to face engagement with consumers. In our view, Red Viole thas the ability to scale thanks to the hosted environment. More specifically, we believe the company will have the ability to increase margins over time, and grow at what we consider to be a high rate.
Confirmation through research
Red Violet has customers access their solution through a hosted environment using an online interface, batch processing, API, and custom integration.[v] The company can be paid on a transaction basis, monthly fee schedule, or both.[vi] We believe, in comparison to other solutions, it is priced lower and provides better solutions using unstructured and structured data. The company, in our view, can fuse billions of disparate records to provide comprehensive profiles.[vii] They use massive databases from public records, proprietary data, and self-reported data.[viii] This can be helpful for businesses that need identity verification, risk management, fraud detection, and collections. As the platform has fixed costs, additional revenue comes in at nearly 100% contribution margins. The margin has been growing from 39% in 2018 to reaching 53% in 2019. In the next 2 to 3 years, we believe it will hit 80% to 90% gross margins.[ix] Further, we believe the company can continue to grow at 80% to 100% per year.[x]
We do not believe the market is assigning fair value to the business, considering the margin expansion, growth rates, and differentiation to peers. We believe that if the management can execute at the growth rate mentioned previously, with the margin expansion, it could be worth a multiple of what this business sells for today.