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Square (SQ) Should Buy Net Element (NETE)

  1. The company has been generating higher revenue year over year.
  2. The mobile payment industry is expected to grow $1 trillion in 2019.
  3. Net Element posted a loss of diluted EPS of $0.25 in its third quarter.

Source: Net Element

Analysis Overview:

Net Element (NASDAQ:NETE) is a mobile payment company. It is part of $620 billion industry as of 2016. This market is expected to grow $1 trillion in 2019. It is growing very rapidly. Everyone is trying to share the market. There are some established mobile payment companies such as PayPal (NASDAQ:PYPL), Shopify (NYSE:SHOP) they are already generating positive net income while the newcomers such as Net Element and Square (NYSE:SQ) are generating higher revenue year over year but yet to generate a positive net income. Let's take closer look at future revenue growth and profitably as per the below detailed analysis.

Source: Net Element

Detailed Analysis:

Mobile Payment Market Share:

As we can see from the below chart, the mobile payment market is growing rapidly. According to the report, the mobile payment market is expected to generate $620 billion revenue in 2016 and $1.08 trillion in 2019.

In 2015, global mobile payment revenue was $450 billion, with PayPal generating $9.07 billion, Square $1.27 billion and Net Element $40.24 million in revenue.

Source: NFC World

Financial and Operation Performance and Forecast:

Revenue: Net Element has been generating higher revenue year over year. The company has five acquisitions so far, two in 2013, two in 2016 and one in 2014. The company generated net revenue of about $21 million in 2013 and about $41 million in 2015. For the first three quarters of 2016, the company generated net revenue of about $39 million. They posted a negative EPS of 25 cents in their third quarter.

Source: Created by Author (data obtained from annual report)

Operational efficiency: From 2014 to 2016, the company has been posting net losses of about $10-13 million per year.

Liquidity: The company's cash position is not bad; it has $1.3 million cash on hand and $5.8 million of account receivable.

Valuation: The company is currently generating negative earnings per share (losing money). As of the third quarter, the average P/B ratio of the semiconductor industry is 4.24, according to CSI Market. Net Element is currently trading at the P/B ratio of about 2. The stock is currently undervalued. The fair value of the stock is about $1.82. Net Element's competitors' shares are trading at the P/B ratio of 3.28 ~ 9.53

= Average P/B ratio of Tech Industry 4.24 x Book Value per Share $0.43

= $1.82 (fair value minimum)

=Average P/B ratio of Net Element's competitors 7.3 x Book Value per Share $0.43

= $2.92 (fair value maximum)

Competitors' P/B Ratio (source: yahoo finance):

  1. Square : 9.53
  2. Shopify : 9.09
  3. PayPal : 3.28

Source: Created by Author (data obtained from 3 rd quarter earnings report)

Takeaway:

In the first three quarters of 2016, the company has already generated almost the same revenue they did generate in full year 2015. Mobile payment is a new industry; it would take some time to establish. For an example, Square is also in the same situation; they haven't made a profit yet. The main thing is a revenue growth. Net Element is growing in terms of revenue generation. As per my calculation, Net Element is worth at least $1.82. There is a huge upside potential. Square acquired 2 companies in 2013, 2 companies in 2014, 2 companies in 2015 and 2 companies in 2016. There is a possibility Square may acquire Net Element.

Based on my analysis, I recommend Net Element as a BUY

Disclosure: I am/we are long NETE.