Terence Chan's  Instablog

CyberSource Corp. (CYBS)
Buy below: $18.00
Stop loss: $15.80
Forward ROA YoY Growth (%): 500
Forward ROA Revisions (%): 50

Business: CYBS is a leading provider of e-commerce payment and risk management solutions. It allows online merchants to have a single integrated platform to accept all forms of payment (credit and debit cards, PayPal, electronic checks, bank transfers, other emerging technologies) from their clients. Its risk management solutions provide anti-fraud and payer authentication technologies. Approximately 273,000 businesses use CYBS' service as of 1H09, up 20,000 over the past 6 months.


Most Recent Results (1H09): Revenues were up 13.1% to $123.4Mil; EPS was up 5x to $0.05 per share. Gross margins were up 250bps; operating margins were at 4.0% from -0.2%.

Balance Sheet (1H09): No debt with 93Mil in cash; close to 4x current ratio; $530Mil in equity.

Cashflow (1H09): ~$15Mil in positive free cash flow

Investment Thesis: Clearly a growth stock coming from a very low base (just turning profitable), and sustained strong momentum with about 15% of revenues coming from new clients. Operating leverage is to its advantage as margins are expanding without the same expansion in cost base. Analyst revisions to EPS remain very strong.

As PayPal and other emerging technologies gain traction with growth in online transactions, they will have to choice but to sign on with CYBS because of its existing networks and more importantly the fraud protection they provide. Most of these technologies will probably come from small start-ups which have limited capital to match CYBS' risk management investments. It would make sense for Ebay to acquire a company like CYBS isn't it?

While the US and Europe still have some ways to go in massively adapting e-payment methods (expected to reach 30% penetration by 2012), CYBS has plenty of growth avenues in other emerging markets were the percentage of people transacting on line are minimal. The stock is part of our US ROA Premium Stock List, the methodology of which is discussed in our post on stock screening methodology.

Technical Analysis: While short-term resistance is at close to $18.00, there is a longer term resistance at about $19.00. The stock is above the 32-day moving average, which shows good stock trading momentum. Support is at the parabola at $17.00 then $16.00. I would suggest that you accumulate this stock.