Payoneer Global: Plenty Of Growth Ahead

seekingalpha05-23

Payoneer has achieved impressive revenue growth, with a 3-year CAGR of 32.5% and growth in every region it operates in.The company has improved its margins and has room for further improvement, ...

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Koh Sze KiatIntroduction I wanted to take a look at a company that is helping SMBs all around the world to manage their financials, like accounts receivables, payables, cross-border payments, and other services that are essential for a business to thrive and operate as effectively as possible. That company is Payoneer (NASDAQ:PAYO). I wanted to take a look at the company’s financials and give some comments on its outlook. The company managed to achieve great results in such a short time, with fantastic margin improvements and plenty of growth in the sector. I begin my coverage of the company with a buy rating, as it seems to be trading at a decent discount currently. The company's competitive advantage in my opinion is the focus on SMBs and freelancers in emerging markets, and developing economies where these sorts of jobs are prevalent. The one-stop shop for all things related to finances in one platform is an easy sell, in my opinion, coupled with easy integration of most major platforms like eBay (EBAY), Amazon (AMZN), and Airbnb (ABNB), which makes receiving money internationally a breeze. Financials The company’s revenues have seen decent growth over the last 5 years, averaging around 27% CAGR. What is more impressive is that the company’s 3-year CAGR is higher, standing at around 32.5%. The company’s growth seems to be accelerating, and that is a good sign. Every region the company is in has seen decent growth over the period, and given the company is still relatively new and small, I’m expecting such growth to continue. However, I am also quite disappointed that the company is projecting around 8.3% growth for FY24. The company recently reported earnings and raised its full-year revenue projections to be between $895m to $905, which at the midpoint ends up being around $900m, or 8.3% growth. It’s quite a drop from the company’s impressive prior year numbers. I will delve deeper into this in the next section. Seeking AlphaIn terms of margins, the company has improved its operations quite well over the last 5 years or so. We can see improvements across the board. In my opinion, these are already quite decent margins, however, I’m sure there is more room for improvement. Seeking AlphaIf we take a look at some other similar companies that PAYO refers to as competition, we can see that PAYO is doing well in efficiency and profitability; however, it can improve more for sure. Probably not to the margins of Adyen (OTCPK:ADYEY), as it is not a perfect competitor due to differences in target market, but given the fact that the company is still in a growing phase, I wouldn’t be surprised to see higher profitability in the next decade. Seeking AlphaWhat is weighing on the company’s margins is stock-based compensation, which did come down in the latest quarter. This should improve the company’s numbers in the long run, if it continues to reduce it. However, it is not unusual for companies like PAYO which are still in a growing phase to continue to offer SBC. In the latest quarter, SBC accounted for around $0.03 of EPS, which would have brought the company’s EPS to around $0.11 a share. The only evidence of reduction I found was the sequential decline in SBC, so nothing concrete from the management on that issue. In terms of the company’s financial position, as of Q1 ’24, which was filed on May 8th ’24, PAYO had around $587m in cash and equivalents, against $14.4m in long-term debt. That is not a bad position to be at all. It doesn’t seem to be overleveraged, which should attract many investors, if the company was better known, in my opinion. It all comes back to it being relatively small and under-covered, which could be an advantage for some early investors. Overall, it looks like the company has been performing well. Revenue growth in the past has been admirable, but next year’s top-line growth seems likely to be subdued. Margins have improved dramatically and in a relatively short period. I believe there is still some room for improvement on that end. Comments on the Outlook For revenues being so much below the previous years, I think the reason is the company has been shifting towards B2B sales efforts on large Ideal Customer Profiles, or ICPs, in service-oriented markets. This shift, in my opinion, will temporarily affect the company’s top-line growth. These sorts of shifts in business focus usually lead to lackluster performance in the beginning, but as operations adjust, so will the growth return. As the management said in the latest quarter, they are expecting revenue to accelerate in the back half of the year, which means the shift is working. The management usually has better visibility than anyone else about what is going to happen in the short term. Therefore, I am taking the comments of the management at face value until we see how accurate they were. Another major factor for such low revenue growth might be because of the current economic slowdowns worldwide. Customers are not as outgoing and are more hesitant to buy products. This may continue a little longer as reduced business activity prevails for now, but we will see things improve later. Regarding revenue split, I would like to see more effort put into diversifying away from China. In the latest quarter, we can see that revenues from Greater China have increased to around 36% of total revenues from 33% a year ago. I don’t think it’s that big of a deal; however, many investors tend to avoid companies that have such high concentration in one region like Greater China, which includes mainland China, Hong Kong, Macao, and Taiwan. The management feels very confident in this region and doesn’t see any negative for now, and only sees great opportunity ahead, citing: Specifically, China, the team there and our brand position there are so strong and the power of our relationships with the world's largest marketplaces, Amazon, Walmart, eBay, Etsy, et cetera, those relationships are strong, and we're picking up customers and cross-selling the full financial stack. We saw great growth in our commercial card product in Q1. As consumers have kept buying in the West is benefiting our merchants in China and we've begun to step back into the B2B business in China. In my opinion, there is a lot of opportunity for the company to expand its presence in the LATAM region. Countries like Mexico, Brazil, and Argentina are growing at an impressive pace and SMEs represent a huge part of the economy. In the LATAM region (and the Caribbean), SMEs comprise 99.5% of firms, which is a staggering amount, and a huge market opportunity for PAYO. I would like to see more effort put into the LATAM region. In the latest quarter, the region exhibited 24% y/y growth, which is not bad, but it could be much better if the company decides to expand there more. The diversification away from Greater China will win over more investors in the end as the concentration risk diminishes. I would like to see the company do more acquisitions in the future in the LATAM region, as I’m sure there are a lot of ways to expand its presence overall. With more than half a billion dollars in cash, nothing is stopping it from inorganic growth and diversification into more regions. Valuation I will present you with what I believe is a conservative model of the company’s revenue and margin potential. For revenues, I went ahead with the company’s midpoint FY24 growth of around $900m. After that, instead of being very optimistic about the company’s growth potential, I am going to linearly grow it down to around 5% for FY33, giving me 7% CAGR for the next decade, which is much lower than what the company managed before, as you saw in the Financials section. Also, this low-balling of growth will act as a sort of margin of safety. Furthermore, I am modeling a more conservative case, and a more optimistic one. Below are those estimates, with their respective CAGRs. Seeking AlphaFor margins, the company managed to improve dramatically in just one year, as you saw in the financials section; therefore, I do not doubt that the company will improve even further over the next decade; however, the improvements will be quite small, to keep it safe. The company will see only a 200bps improvement in gross margins, 600bps in EBIT margins, and 400bps in net margins over the next decade, which I think is very achievable by the way the company is progressing right now. Operating expenses seem to be very high still due to the company being relatively young, so I expect further efficiencies to kick in if it can continue to leverage its platform to its full potential and continue to acquire Ideal Customer profiles. Furthermore, the company announced its restructuring plan in Q3 '23. They are looking to streamline operations and reduce its workforce by 9%. This should positively impact its operations in the long run too. However, these are my assumptions only, so take them with a grain of salt, but in my opinion, further efficiency is achievable. Seeking AlphaFor the DCF analysis, I went with the company’s WACC of around 7.6% as my discount rate, and a 2.5% terminal growth rate because I would like the company to at least match the US long-term inflation goal. See below my calculation for the WACC.   AuthorAdditionally, I am going to discount the final intrinsic value of the company by 15%. I believe that this should be sufficient given that the company has very little debt on books, but is quite a small company, so I need additional downside protection. With that said, PAYO’s intrinsic value is $7.1 a share, which means the company is still trading at a discount to its fair value, even with such conservative estimates. Intrinsic Value (Author)Risks Further expansion into other regions may not be successful and may carry suboptimal returns, which will weigh on the company’s profitability until the management fixes the issues. This will bring volatility to the company’s shares. The company is currently at around $2B market cap, which, as I mentioned previously, is quite small in my opinion. Larger competitors with deep pockets might enter their territory and take a lot of the market share from PAYO and force them out of the competitive scene. Another risk is the company’s stock price may fluctuate quite a bit since it is a small cap (up to $2B market cap is a small cap). These tend to see a lot of volatility daily, as these may be traded more lightly, so any bigger buyer or seller of the company’s shares may introduce large fluctuations. In terms of macroeconomy and concentration risk, if we see further downturn not just in the US but in other regions like China, or more regulations pop up that could hurt the company’s top line in those regions, expect volatility and be prepared to stomach it if you believe the company has a good future. Closing Comments  So, it looks like even with such estimates, the company is still trading at a discount. Should you buy, or add to your current position? It is up to you. Do you believe the revenue acceleration is returning and high-single-digit revenue growth will turn into double-digit growth? In my opinion, I believe that to be the case. The company has a lot of cash that it can deploy towards acquisitions in the less covered regions like LATAM as mentioned above, or it can do more share buybacks, as I think the company is trading at a decent discount. I would prefer acquisitions as that would benefit shareholders in the long term more. With such a healthy financial position, possibilities are endless, and I am eager to see what the company is going to do in the future to benefit the shareholders.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2437321714"}