Is Nuvei Stock A Buy, Sell, Or Hold For 2022?
Summary
- NVEI’s breadth and depth of offerings give it an edge.
- NVEI’s growth trajectory is still intact although margin progression could stall in the near term.
- Given its earnings growth potential relative to its peers, NVEI appears to be attractively priced.
- NVEI has the cash-generation capacity and the balance sheet to fulfil its inorganic ambitions.
- The NVEI stock appears to have made a bottom and could work as a speculative buy for aggressive-minded investors.
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Introduction
Nuvei Corporation (NASDAQ:NVEI) is a provider of global payment technology and infrastructure for merchants based in North America, Europe, Asia Pacific, and Latin America. Through its single integration tech platform, Nuvei Corporation helps over 50,000 merchants accept payments across 200 global markets, in over 500 differing payment methods, and 150 odd currencies; NVEI also provides pay-in and payout support for around 40 of the world’s leading cryptocurrencies. Put another way, Nuvei’s goal is to make the world a local marketplace by removing payment and back-office barriers for its customers who predominantly belong to the mobile commerce and e-commerce markets.
Source: Q3-21 earnings presentation
Notable recent developments
In Q3-20, the company had made its debut on the Toronto Stock Exchange (incidentally this was the largest ever tech IPO on the TSX with $805m procured in gross proceeds) and then followed this up with another listing on the Nasdaq in early October 2021 (the shares that trade on the Nasdaq are subordinate voting shares of NVEI). Besides the oft-touted rationales of pursuing growth and boosting their capital position, NVEI management also highlighted their need to become more relevant with the institutional investor cohort and also to enable their employees to have greater accessibility. Due to tradability and compliance issues, NVEI employees in certain countries face greater encumbrances in trading the Canadian listed NVEI option vs the Nasdaq listed option.
Then, on the 8th of December 2021, Spruce Point Research dropped a short report on NVEI, alleging amongst other things, nefarious and questionable business relationships and weak financial disclosures. The research firm also questioned NVEI’s premium valuation relative to other financial technology peers and suggested then, that 40-60% downside potential was in the cards!
Prima facie, some of the allegations were no doubt concerning and may have left some scars on NVEI’s reputation, but in response to this, also note that NVEI’s board led by its independent directors, resorted to legal counsel and stated that Spruce Point’s claims were “misleading, false or unrelated to Nuvei’s business”. The board also added that the company’s financial and other disclosures are “accurate in all material respects”. Besides this, NVEI's management also reaffirmed both their FY21 outlook as well as their medium-term volume, revenue, and adjusted EBITDA targets (30% annual growth on the first two metrics and a progression towards 50% margins).
Source: Q3-21 press release
Regardless, by the looks of things, NVEI does not appear to be a stock meant for the faint-hearted, but if you’re someone with an aggressive risk appetite and you’re prepared to take the NVEI team’s words at face value, I believe at current levels, NVEI appears to be a buy.
It’s not every day that you get to pick up a high-growth and well-rounded payment tech company at decent valuations (more on valuations later). Besides, you could also make a case for Spruce Point’s 40-60% downside scenario having already largely played out; from the Dec 7th close of $97.35, the day before the report was released, the stock had dropped by ~56% (before recouping some of its losses). NVEI is still down by ~33% since December 7th.
Here are some reasons why a long position in NVEI's stock may be considered by investors with an aggressive risk appetite.
Compelling business model with solid capabilities
Principally, there’s a lot to like about Nuvei Corporation’s business model. NVEI isn’t like your plain-vanilla type payment processor; rather what you get is an integrated offering – rendered via the Nuvei Native Commerce Platform - encompassing a whole host of services ranging from gateway to currency management, to risk management, to card issuances, etc. (A lot of NVEI’s peers who cater to the SMB cohort would only largely be specializing in one domain area, or two or three at the most).
When you have a myriad of offerings all present in one single integrated platform it’s very difficult for potential clients to look away, given the convenience on offer; it also helps weed out unnecessary latency challenges across the archetypal e-commerce/mobile commerce payment chain. This also makes the entire payment chain a lot more efficient, and NVEI’s customers can then spend time growing their business rather than focusing on addressing different aspects of their payment chains with multiple vendors. Crucially, potential merchants can pick and choose what aspect of NVEI’s offering they’d like to access, to tackle different challenges for different geographical regions across the world.
Source: Q3-21 earnings presentation
Source: Q3-21 earnings presentation
In an increasingly digitized commerce world, a well-rounded flexible offering such as Nuvei’s is also useful for merchants who want to expand beyond just the local market and cater to other regions across the world. Do consider that purchasing patterns in the Asian market could be a lot different from the North American market; for instance, consider that in Nuvei’s home turf (Canada), credit card-based payments are a very common payment tool and are incidentally the highest in the world (credit card penetration in Canada is 83%), but say Nuvei’s local Canadian merchants want to tap into the high-flying e-commerce market in India, well here they’d clearly have to come up with alternative modes of payments, because credit card penetration in that market is only 3%! To address issues like this Nuvei’s platform offers 500 alternate forms of payments.
Recently they’ve also beefed up their expertise in cryptocurrency acceptance and currently cover 40 different cryptos. This may not necessarily be mainstream as yet, but it will grow over time and NVEI will likely have benefitted from this first-mover advantage. One of Nuvei’s key focus markets is the online gaming space and particularly in this arena, one needs to have a range of alternative payment modes with cryptos in particular fast emerging as a popular option.
In effect, the depth and breadth of Nuvei’s offerings mean they can build long-standing relationships with merchants across the globe, and this also opens up the opportunity for greater cross-selling (customers who only initially resort to NVEI for their gateway services soon embrace other processing offerings over time) even as they participate in the growth journey of their clients.
NVEI is also not overexposed to any one vertical and this helps provide some added protection to the business model; currently, they are exposed to seven different high-growth verticals (online retail, online marketplaces, regulated online gaming, digital goods & services, financial services, travel, and social gaming) none of which account for greater than 20% of group revenue.
Source: Q3-21 earnings presentation
Valuations are not entirely reflective of the attractive growth profile of NVEI
Besides the exposure to high-growth markets, NVEI’s combination of volume-based or transaction-based revenue (as a function of merchants’ daily sales), fee-based revenue (for value-added services), and monthly subscription-based revenue (levied on things like their business intelligence tools, merchant dashboards, etc.), mean you have a very stable and sustaining revenue-generating business, with different levers.
Then, as they deepen their cross-selling engagements, you will likely see greater operating leverage and flow through to the bottom. Notice how adjusted EBITDA margins that were around the 30% levels a couple of years ago are now closer to 44%, with the company’s goal of getting it to 50% in the long term.
Source: Prepared by the writer using data from the quarterly reports
Then, over the last three years, the volume, revenue, and adjusted EBITDA have grown at exceptional CAGRs of 75%, 58%, and 78% respectively (For the 9M-21 period, volumes, revenue, and adjusted EBITDA are even better than the long-term average coming in at 119%, 97%, and 102%, respectively)!
Source: NVEI Annual Report
As highlighted in the previous sections of this article, this is a business that is poised to deliver ~30% annual revenue and EBITDA growth for the foreseeable future (indeed YCharts estimates for FY22 and FY23 pegs the expected annual revenue growth at ~32% and 28% respectively, whilst the corresponding expected annual EBITDA growth is ~32% and ~31%, respectively).
Admittedly, whilst the goal is also to get to 50% adjusted EBITDA margins, I think this may be a little harder to achieve in the short-term as the company is in the process of deepening its sales engagement particularly via its direct sales channel (currently they sell via three channels- direct, indirect and strategic platform integration) and this could maybe put the brakes on significant margin progression.
There’s already some evidence of this via slowing operating leverage and a spike in compensation costs. Around 6-7 quarters back, the adjusted EBITDA growth was coming in at around 2x the growth of revenue. In recent quarters it is closer to a 1:1 relationship. In regards to this, do note that employee compensation for 9M-21 is up 74% YoY and in the recently concluded Q3 alone, it was up a whopping 102% YoY!
Source: Prepared by the writer using data from the quarterly reports
That said, it’s imperative that NVEI deepens its salesforce at this stage of the life cycle as it appears to be quite underdeveloped. In fact, NVEI management is on record stating that they doubled their sales force this year because typically even though they have the requisite tech to flourish, hitherto, much of their client wins have come via word-of-mouth. This is certainly less-than-ideal.
Also, if there is a foible with regards to the NVEI story it is perhaps that they’re overly exposed to SMB clients and typically these are clients who tend to compete primarily on price, which is not ideal over the long run; I believe it would be conducive for NVEI to start bidding for larger enterprises as they have the requisite tech to cater to this cohort and it is up to NVEI's salesforce to then serve as key agents in this transition.
Regardless, even if one assumes flat EBITDA margins, which is what consensus is currently estimating, you’re still looking at a business with an impressive margin profile of 44-45%; considering this I believe the forward EV/EBITDA multiple of NVEI looks rather cheap at only 23x (well below its average of 37x).
Granted, if you look at NVEI’s forward P/E in isolation at 39x this may appear to be pricey, particularly as the average forward P/E multiple of its data processing and outsourced services peers is closer to 32x! But I’d urge you to consider the growth angle here as well; you’re looking at a company that is growing its EBITDA and revenue at 30% levels. Thus, if you look at something like the forward Price to earnings “growth” ratio (PEG) ratio, NVEI actually appears to be something of a bargain, trading at a multiple of just 0.61x, more than 3x lower than the peer set average of 1.9x.
NVEI has the cash-generating capacity and the balance sheet to fulfil its inorganic ambitions
M&A remains a vital aspect of the NVEI story and is typically pursued to add more capabilities to the integrated platform and to also deepen the company’s geographical reach. Consider something like the Simplex acquisition which will help build NVEI’s risk management practice with its crypto offerings; Simplex has this AI platform that studies previous customer behavior and helps mitigate some of the inefficiencies that tend to arise during pay-in/pay-out conversion from cryptos to fiat currencies.
Source: Q3-21 earnings presentation
Then something like the Paymentez acquisition was crucial for NVEI to spread its reach in the e-commerce markets of the Latam region, an area where it is underrepresented (alongside Asia Pac). Despite seeing aggregate volume growth of 150% in Q3, both these regions jointly only contribute ~5% of group volumes. I believe NVEI will resort to ample M&A in this region over the next 12-18 months to ensure greater contribution from these two regions. Regardless, to facilitate all this, NVEI has to have the requisite capital and the balance sheet (in 9M-2021 they’ve spent nearly $400m in aggregate for M&A) which I believe they do.
Source: Q3-21 earnings presentation
Firstly, NVEI is not like most high-growth companies that typically burn cash; at the end of 9M-21 the operating cash flow stood at over $200m growing by more than 4x versus the year-ago period; this also represents an extremely strong conversion from the EBITDA (a hallmark of good cash compounders). Last year they were only able to convert 44% of the adjusted EBITDA to operating cash flow but this year the ratio has been closer to 90%. From a shareholder perspective, also consider that the FCF yield on the NVEI stock is currently at 2.4%, above the average of 1.37%.
Regardless, currently, NVEI also has nearly $300m of cash on its books and its leverage is also well-controlled without it coming across as too prohibitive; NVEI’s 9M-21 adjusted EBITDA of $225.8m actually covers the group net debt (net debt to adjusted EBITDA of just 0.98x). Thus, if they want to do a series of bolt-on acquisitions, or if they want to pursue a large-scale acquisition that provides capability, geographic reach, and scale, they sure do have the elbow room to resort to this.
Where is Nuvei Stock Heading in 2022? Technical factors look encouraging
Technically as well, I believe certain green shoots can be spotted with the NVEI stock. After a pronounced rout in selling, one is ideally looking for some signs of bottom formation and I believe we may have seen some signs of this with NVEI.
Source: TradingView
On the daily chart we can see that since its Nasdaq listing date in early October 2021, NVEI's stock has left imprints in the shape of a descending channel. In December when the short report was released, the stock collapsed well below the lower boundary of this channel, but we began to see some signs of a bottom formation down around the $50 level. Further validation of the bottom formation was provided a few days later with the MACD line crossing the signal line a few days before Christmas. Towards the end of 2021, we've also seen the stock break back into its old descending channel pattern and it is still some way from the upper boundary of this channel, implying a decent risk-reward.
Closing thoughts - Is Nuvei Stock A Buy Sell, or Hold?
NVEI is clearly not a stock for everyone, but it could work as a speculative buy for aggressive-minded investors. Recent events may have dampened the narrative around Nuvei and opened up something of a trust deficit with the management team. That said, if you are prepared to take the board and the management’s words at face value (note that NVEI also has to pass stringent due diligence and disclosure tests from both the exchanges-Nasdaq and TSX, various institutional investors, PE control investors, etc.), I believe you’re getting a high-growth, well-rounded global payment solutions provider at a very decent price point and valuations.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
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Comments (15)
Already integrated with Shopify.
Thanks
I'm waiting for a dip. I could have bought @ 💲74 Canadian and sold over 💲87 in two days❗
It went from the 170's to the 60's rather quickly, and the 60's wasn't that long ago.
Next target is the 50dma at about 105 and change.
Roadmap is very clear, which enables 30% CAGR for years to come.The beauty of high FCF conversion is the ability to acquire emerging companies with complementary capabilities. This is a fabulous infrastructure payment play.
