Solium Capital Inc. shares have been trading near all-time highs after the financial technology company signed a "game changer" deal with brokerage giant Morgan Stanley.
The Calgary-based company's stock has since pulled back, however, amid concerns of volatility in the next few quarters as it invests millions to execute the agreement.
Solium provides cloud-based software that manages employee equity incentive plans. Morgan Stanley will use Solium's Shareworks platform to handle equity compensation plans for its approximately 300 corporate clients.
Solium said it expects annual revenue from the deal to be about $18-million (U.S.) once the platform is up and running, which is expected in the second half of 2018. Solium will spend $10-million to $15-million over the next 24 months to build it out.
"It's a significant win for Solium," said CIBC World Markets analyst Stephanie Price.
Because it's not an exclusive deal, Ms. Price said it could also open the door for Solium to sign similar contracts with other large U.S. customers.
She increased her target price on the Toronto-listed stock to $9.25 (Canadian) from $7.50, but maintained her "sector performer" rating (which is similar to a "hold" rating) because of the pressure the extra investment will put on the company's margins.
She reduced her 2017 EBITDA (earnings before interest, taxes, depreciation and amortization) margin forecast to 9 per cent, versus 16.5 per cent previously.
Once the platform is ready, Ms. Price expects it to boost Solium's revenue by about 20 per cent a year and bring margins back to the 20-per-cent range after 2018.
"The Morgan Stanley deal is definitely going to be positive for them … but it's going to take awhile to implement," she said.
A handful of analysts increased their targets on the stock in recent days, bringing the consensus price to $9.64, or about 20 per cent above where it's currently trading, around $8.
Solium shares jumped by as much as 25 per cent in the two days after the deal was announced on Nov. 17, to a 52-week high of $8.88. That's just shy of its all-time high of $9.04 in January, 2014. In the past few days, the stock has retreated to about $8.
Five of eight analysts who cover the stock have a "buy" recommendation and three have a "hold."
Canaccord Genuity analyst Robert Young has a "buy" rating on the stock and recently increased his target to $10 from $8.50, calling Morgan Stanley a "big fish" for Solium.
"Some may argue it is a shark (because of the near-term cash investment needed and consumed)," he said in note.
"If they can execute well in the next couple of quarters and give us confidence that revenue will be on track, or even early, then I think that will be very good for the stock," Mr. Young said in an interview.
He also cautions investors to be patient.
"I believe the company is undervalued. I believe it's a good investment but I wouldn't buy it for the near-term, I'd be looking more towards the long-term," he said.
In a call with analysts, Solium chief executive officer Marcos Lopez called the deal "a game changer for Solium in the U.S. market," and one that "advances us closer to our goal of becoming the global industry leader."
In an interview, he said the contract won't deter the company from seeking potential acquisitions.
"We'll obviously be extremely sensitive to execution risk on all of this, but I don't think it has to preclude doing acquisitions at this point," Mr. Lopez said.
While the Morgan Stanley agreement is "a huge stamp of approval" for the company, Bruce Campbell, portfolio manager at StoneCastle Investment Management, isn't about to buy the stock again.
"We aren't looking at this right now and saying 'we have to jump on this,'" said Mr. Campbell, who bought the stock in January, 2014, and sold it for a loss about nine months later.
He considers the shares to be expensive today and said the benefits of the new deal aren't yet reflected in its earnings.
"What effect it will have on the actual earnings is a still a ways out," Mr. Campbell said.