Red Violet Inc: Here’s Why It Might be Time to Look at This Tiny Data Stock

Institutions Have Been Noticing This Data Play

As part of my trading process, I like to look at the money trail of institutional investors. This is especially true when analyzing small companies that are absent of any major sell-side coverage, as it offers insight into how Wall Street feels about those companies.

Take the case of Red Violet Inc (NASDAQ:RDVT). Institutional investors have been jumping on board, with their ownership rising to 37% of the outstanding shares, compared to 26% in April. (Source: “Red Violet, Inc. (RDVT),” Yahoo! Finance, last accessed July 2, 2021.)

My view is that investors should take notice when the professional money is beginning to jump in.

Red Violet Inc provides software and services to drive data analysis and generate critical intelligence for clients.

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The company is small, with a market cap of roughly $290.0 million. Most institutions won’t touch a company of this scale, so the increase in institutional holdings is a bullish sign.

RDVT stock has underperformed the Nasdaq, down by 9.3% this year and up by 31% over the past year.

Chart courtesy of StockCharts.com

In my view, Red Violet stock provides investors with the potential for above-average capital appreciation.

Strong Revenue Growth Supports Bull Case for RDVT Stock

A look at Red Violet Inc’s five-year revenue picture shows promise.

The company reported only $4.6 million in revenues in 2016, but it followed that with four straight years of double-digit growth to a record in 2020. Its compound annual growth rate from 2016 through 2020 was an impressive 65.6%.

Fiscal YearRevenues (Millions)Growth
2016$4.6N/A
2017$8.687.1%
2018$16.390.0%
2019$30.385.8%
2020$34.614.2%

(Source: “Red Violet Inc.” MarketWatch, last accessed July 2, 2021.)

While there are no analyst estimates available for Red Violet, I expect the company’s revenue growth rate to normalize as its revenue base increases.

Based on Red Violet’s first-quarter record revenues of $10.2 million (up by 10% year-over-year), its revenue growth rate is moderating. The reality is that the company needs to deliver stronger revenue growth to drive up the price of Red Violet stock.

In the meantime, Red Violet Inc also needs to move toward delivering earnings before interest, taxes, depreciation, and amortization (EBITDA) income and offer a pathway to profitability.

A positive sign is that, in 2020, the EBITDA loss declined and the company delivered adjusted EBITDA income.

Fiscal YearEBITDA (Millions)Growth
2016-$9.7N/A
2017-$11.2-14.6%
2018-$5.154.4%
2019-$7.9-54.0%
2020-$2.272.2%

(Source: MarketWatch, op. cit.)

Red Violet Inc has yet to be profitable on a generally accepted accounting principles (GAAP) earnings-per-share (EPS) basis, but its GAAP diluted EPS loss narrowed to a five-year best in 2020.

Fiscal YearGAAP Diluted EPSGrowth
2016-$0.84N/A
2017-$2.08-146.8%
2018-$0.6767.9%
2019-$1.03-53.8%
2020-$0.5744.7%

(Source: MarketWatch, op. cit.)

While Red Violet’s EBITDA income and EPS profitability haven’t surfaced yet, the company was free-cash-flow positive in 2019 and 2020.

Fiscal YearFree Cash Flow (Millions)Growth
2016-$6.9N/A
2017-$10.9-57.1%
2018-8.125.5%
2019$2.0124.5%
2020$6.9244.7%

(Source: MarketWatch, op. cit.)

Analyst Take

Although Red Violet Inc has plenty of work ahead in this competitive market, RDVT stock has tremendous upside if the company produces better financial results.

As mentioned earlier, institutional investors appear to be jumping on board Red Violet stock, so there are reasons to be optimistic.