According to its management, Qiwi (QIWI) is a cutting-edge fintech Russian bank. Qiwi consists of a chain of terminals, an e-wallet, processing of bookmaker’s payments and unprofitable banking products (Sovest + Rocketbank).
Qiwi's shares have shown significant growth - up 50% - over the last several months. This huge surge mainly came as a result of the positive 1H19 earnings report: the total segment net revenue rose to 10.3 bln rubles, up 26% year over year, the total segment net profit totaled 3.6 bln rubles, up 85% year over year. Meanwhile, despite a considerable increase in financials, Qiwi still looks overvalued compared to its Russian peers, and its further growth may well be undermined by various factors.
Qiwi mulitpliers vs. Russian banks TCS and Sberbank (OTCPK:OTCPK:SBRCY). Source: Bloomberg
Qiwi’s core business is payment processing services for the sports betting industry. According to different estimates, Qiwi earns 35-40% of its revenue from betting. Moreover, the betting business is the only source to potentially boost Qiwi’s revenue and net profit, which may justify the current valuation. The main investors' question is whether this potential will be realized.
Here is the popularity dynamics of the “sports bets” search term, according to Google Trends data:
Popularity dynamics of the "sports bets" search term. Source: Google Trends
This chart clearly shows that the entire betting market in Russia has not been rapidly expanding. Thus, the source of Qiwi’s growth is not crowds of new clients joining the betting world, it is rather the betting industry abandoning its illegal character after the legalisation of online bookmakers in 2014. And no one knows how much of the betting business still remains in the shadow.
Here is the dynamics of popularity of the bookmakers that are members of the Association of Bookmakers, Qiwi’s only client in this segment. Aggressive marketing did its job, leading to a significant increase in the number of visits. However, will the uptrend continue? There is no answer that may give confidence to Qiwi’s shareholders.
The volume of Qiwi e-commerce business correlates with the number of website visits of bookmakers. Source: Similarweb, company reports
The only thing that is clear in betting is a desire of the Association of Bookmakers to lower payments to Qiwi. The whole revenue of bookmakers is 10-15% of their business volume, and they currently pay approximately 3.5-5% to Qiwi (according to Forbes sources), which is obviously excessive. The Association has realised it and, consequently, started to drop payments, which is clearly shown by trends in Qiwi’s e-commerce net revenue yield:
Qiwi e-commerce net revenue yield declines 5 quarters in a row. Source: company reports
An article on the potential selling of Sovest, Rocketbank, and, what is most important, Sergey Solonin’s, Boris Kim’s and Otkritie bank stake in Qiwi was published in the Kommersant newspaper several weeks ago. But even before that, investors noticed that something suspicious was happening to Qiwi’s shares. These suspicions may not be groundless: the desire to sell a big block of shares could be a logical explanation of the surge in Qiwi’s share price.
On the same day when the Kommersant article was published, Sergey Solonin denied the possibility of selling the controlling stake, but he said nothing about selling the stake that will keep his control.
According to Russian Rocket calculations, if Solonin, Kim and Otkritie bank sell their stakes (with Solonin’s stake falling to 50% of votes), the total sale amount will be $56 mln. As Kommersant’s sources say, it is hard to find anyone who will be ready to buy a significant part in such a risky business as Qiwi with such a high valuation as now.
Therefore, the only possibility for Solonin and others to get rid of extra shares is to give a significant discount, which adds another risk for Qiwi's shareholders.
The Russian government approved banning the anonymous replenishment of e-wallets on July 26, and Qiwi is the only company that will be really hit by this law. Commissions from various anonymous e-wallet operations are the second largest part of Qiwi’s business. Qiwi is currently widely used by drug dealers, illegal migrants, and others, who vitally need anonymity. Qiwi will immediately lose these clients as soon as their anonymity is not preserved.
Common customers do not usually use Qiwi’s services, because there are numerous peers that offer more convenient means of payment, like fintech banks (Sberbank, Tinkoff, etc.) and other payment systems (Webmoney, Yandex.Money (NASDAQ:YNDX)). Another supporting evidence is the statistics on active plastic cards in Russia. Why would you need Qiwi services, if you have more than one plastic card?
Source: The Central Bank of Russia
Qiwi understands its vulnerability. Hence, it is trying to influence the Russian government and have this law repealed. This makes us believe that Qiwi's business is heavily dependent on anonymity and illegal clients.
The Two Scenarios
Based on everything that was mentioned, there’re two possible scenarios of Qiwi’s future.
Blue-sky scenario. It involves cancellation of the ban of anonymous e-wallets, keeping bookmakers' commission on the current levels and preserving stake of Solonin, Kim and Otkritie bank. In this scenario, Qiwi may reach a single-digit P/E value in 2-3 years if shadow part of betting business turns out to be big enough; further growth until peers' valuation requires creating of some new directions of business or fundamental revalutaion of existing. So in this blue-sky scenario, Qiwi is near its fair estimate according to peers' valuation.
Negative scenario. This implies that one or all of the risks will become reality. Aggressive politics from Association of Bookmakers may halve Qiwi's revenue from e-commerce. Ban of anonymous e-wallets will deprive people of last motivation for using Qiwi. In this scenario, Qiwi will lose a significant part of net revenue and net profit which leads to a fall to $10-15 per share.
In the blue-sky scenario, Qiwi seems to be fairly valued. In the negative scenario, it has a huge downside. Thus, I don’t see any reasons to keep this company in your portfolio. And in the case of Qiwi it is highly uncertain which of the two scenarios will be realized. That's why it is best to avoid holding Qiwi's shares until there is a clear understanding of how the three risks will be resolved.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.