Shares of CheckFree Corp. had a rough time last week, with two analysts downgrading it and one going so far as to assign it a rare "sell" rating.
The latter was Gregory Smith of Merrill Lynch Global Securities, who argued that CheckFree's stock is overpriced and that its growth prospects are not what they might seem.
A software company specializing in electronic billing payment and presentment, CheckFree faces stiffer competition not only from competing vendors, but also from banks as they move their services in-house, Mr. Smith said. CheckFree counts both banks and individual consumers among its customers.
Mr. Smith's downgrade of CheckFree to "sell" from "hold" came Wednesday, two days after David A. Trossman of Wachovia Securities cut his rating to "market perform" from "outperform." Mr. Trossman based his view more on the value of the company's stock - which had almost quadrupled from a low of $7.46 last August - than on its business model or growth forecasts.
Mr. Smith drew from his analysis of a model of the Atlanta company's internal finances. He pointed to revenue minimums that CheckFree receives from Transpoint LLC, the EBPP joint venture it bought in 2002 from Microsoft Corp., First Data Corp., and other investors. He said those guaranteed revenues, now highly profitable for CheckFree, could expire in 2005, but that the stock price does not take that risk into account.
More worrisome to Mr. Smith was that Bank of America Corp. - CheckFree's largest client and a major shareholder - seems to be playing an increasingly important role in the vendor's revenue stream. He calculated that B of A, which outsources all its retail electronic bill payment and presentment services to CheckFree, accounted for 19% of the software company's revenue in its fiscal third quarter, which ended March 31, against 12% a year earlier.
"While Bank of America has been a tremendous growth driver for CheckFree historically, we see this customer concentration becoming more of a source of risk in the years ahead," Mr. Smith said. He added that he expects consumer adoption of online bill pay to slow over the coming quarters.
Mr. Trossman also voiced concern about revenue guarantees from First Data and Microsoft, but said that he foresaw growing acceptance of electronic bill payment by consumers, which would be good for CheckFree.
He said his firm still considers CheckFree "the best electronic bill payment engine in the industry by far." Large banks do continue to bring online bill pay services in-house, but CheckFree could offset losses from these customers by signing up more small and midsize banks, Mr. Trossman said.
"We would like to own [stock in] this company," he said in a research note, "but we would like to wait for a more attractive entry point in what seems to us a relatively volatile stock."
A CheckFree spokesman said it does not comment on analyst reports.
CheckFree shares closed Friday at $23.46, down 19% on the week.
