There’s no argument that fintech is a hot sector. Square Inc (NYSE: SQ) and Canadian based Shopify Inc. (NYSE: SHOP) have both had an incredible first half of 2020, and seem to be continuing their run. While these are both impressive stocks, investors seem to be missing one of the biggest opportunities in fintech, another Canadian company, Mogo Inc (NASDAQ: MOGO).
The Valuation Of MOGO Stock Is Ridiculous
As mentioned above, I believe Mogo to be one of the biggest opportunities in the fintech sector available today. With their recently launched MogoSpend account, the Company is now clearly positioned as the Square Cash App of Canada. In addition, Mogo generated incredible growth in net cash flow this past quarter which helped it find its way to the good side of four well-respected analysts.
Not to mention, from a valuation standpoint, it is the most attractive stock in the sector by far. At the moment, MOGO is trading with a market cap of around $50 million. Interestingly, in the second quarter, the company generated revenue of $8 million.
Even if the company were not to achieve any growth, that would equate to annual revenue of approximately $32 million. When was the last time you saw a fintech that traded at just over two times revenue?
To put that figure into perspective, take a look at the two names mentioned above. Square is currently trading at more than 20 times revenue, while Shopify trades at more than 40 times revenue.
Why The Low Valuation?
So, what is it that seems to be putting a cap on MOGO stock? Investors seem to be focused on Mogo 1.0 when what we’re really looking at here is Mogo 2.0. Allow me to explain.
For the past few quarters, Mogo has seen a decline in revenue. Of course, investors don’t like to see declining revenues, which is leading investors to hold the stock down. But there are a few things that investors don’t seem to be paying much attention to:
- Sale To Goeasy (TSX: GSY). In the first quarter, Mogo announced that it had sold the consumer loans portion of its business to Goeasy for $31.9 million. Of course, with the company’s consumer loan assets being sold, revenue from these assets is no longer included in the top line, leading to much of the declines in revenue that we’ve seen. Nonetheless, this sale seemed to be a great move, lending a big hand to Mogo’s swing to positive free cash flow.
- Decreased Loan Book. As COVID-19 began to take hold, Mogo greatly decreased its loan book in an effort to avoid defaults. It has been overwhelmingly successful in doing so as well. Only about 6% of the company’s borrowers needed relief associated with the pandemic, with only about 1% of accounts still receiving relief. At the same time, defaults were amazingly low, showing that even in the face of a pandemic, MOGO has the ability to make tweaks to perform positively.
- Member growth of 20% to over 1 million. Mogo did see strong growth in its member base in the recent quarter and now has over 1 million members in Canada making it one of the leading fintechs in the country.
- Swing To Positive Free Cash Flow. While revenue was down year over year in the second quarter, the quarter proved to be the first time the company generated positive free cash flow. In fact, during a single quarter, the company saw a more than $11 million swing in free cash flow, pushing more than $7 million into the positive.
- The Launch Of New Products. Finally, following the sale of the consumer loan book, Mogo has been working feverishly to expand revenues, and seems to be on the track to doing so. The company recently announced the launch of MogoSpend and multiple referral partnerships, both of which have the potential to drive tremendous revenue for the company.
The bottom line here is simple. Investors are looking at the Mogo of yesterday. The Mogo that was generating larger revenues, but was not making it to positive free cash flow. Today, the company has restructured in such a way that it is breaking into profitability while launching multiple new revenue opportunities. Ultimately, today’s MOGO is a brand new company, making historical data irrelevant.
Perhaps that’s why Raymond James, Canaccord, Briley and other highly-respected analysts suggest that there is room for tremendous gains in the value of the stock ahead.
As MOGO continues to solidify its position as the leading fintech provider in Canada, the market is greatly undervaluing the stock. With valuation metrics that are significantly below their peers in the space, several analysts suggesting that serious gains are ahead, and a shift to profitability thanks to smart moves in response to COVID-19 as well as the restructuring of the company’s products, MOGO is a stock that you should seriously consider.
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