Investment Idea: Black Knight, Inc. (BKI)
Black Knight, Inc. (BKI): Investment Idea
1. Executive Summary
Black Knight is a leading provider of mission-critical software and data analytics to the mortgage industry, offering a compelling SaaS model with high switching costs and strong recurring revenue. We believe BKI is undervalued, driven by its strong market position, stable revenue streams, and potential for margin expansion as cost synergies from the Dun & Bradstreet carve-out are realized.
2. Investment Thesis (Bull Case)
- Dominant Market Position and High Switching Costs: BKI holds a dominant position in the mortgage technology landscape, particularly with its MSP servicing platform. MSP's complexity and mission-critical nature create significant switching costs for clients, resulting in high customer retention and predictable recurring revenue. This dominance extends to other solutions like Servicing Digital, and creates cross-selling opportunities.
- Resilient Recurring Revenue Model: The majority of BKI's revenue is recurring, providing significant stability and predictability, even during periods of mortgage market volatility. This resilience is especially important given the cyclical nature of the mortgage origination market. Their servicing-based revenue continues regardless of origination volume.
- Strategic Data & Analytics Segment: The Data & Analytics segment provides valuable insights into the housing market and is a key differentiator. Products like automated valuation models and collateral risk scores are increasingly important for risk management and compliance, driving demand and allowing for premium pricing. The large volume of mortgage transactions processed on its software platforms feeds into the value of its data and analytics.
- Margin Expansion Potential: We anticipate margin expansion driven by cost synergies from prior and future acquisitions, including the integration of previous Dun & Bradstreet carveout. The efficiency improvements in software development, data processing, and sales & marketing should contribute to improved profitability over the next few years.
- The $12 Trillion outstanding mortgage market in the US and a growing number of mortgages internationally provide a large and growing market for Black Knight's services, reducing pressure and reliance on cyclical new mortgage originations.