JulPo
Nuvei Corporation (NASDAQ:NVEI) may have significantly overpaid for Paya Holdings in February 2023, which is reflected in the suppressed share price at the moment, although the acquisition of Paya fits very nicely in Nuvei’s long-term strategic plan. The benefits from the acquisition of Paya may take longer to realize for Nuvei.
Introduction:
Nuvei is a global payment technology company. They offer a range of payment processing solutions, including online and mobile payments, to businesses of various sizes across multiple industries. Nuvei’s services facilitate seamless and secure transactions, supporting a wide array of payment methods and currencies. The company aims to streamline the payment process, enhance customer experience, and help businesses grow by providing integrated payment solutions tailored to specific needs and market demands. Their technology-driven approach focuses on innovation, efficiency, and scalability in payment processing. Nuvei’s main competitor is Stripe rather than Block (previously Square). While Stripe is known for its developer-friendly platform and strong online payment processing capabilities, Nuvei’s difference lies in its ability to offer diversified, customizable, and globally oriented payment solutions, along with specialized support and expertise in certain market segments.
In February 2023, Nuvei acquired Paya in total cash consideration of $1.4 billion.
Paya is a financial technology company that provides integrated payment solutions, focusing on business-to-business (B2B) transactions. It offers services such as payment processing, digital invoicing, and integrated payment platforms, catering to various industries including healthcare, education, and government. Nuvei acquired Paya to enhance its payment technology offerings, expand its B2B payment capabilities, and increase its market reach. The acquisition aimed to combine Nuvei’s innovative payment solutions with Paya’s expertise in B2B transactions, thereby strengthening its position in the payment technology sector and offering more comprehensive services to its clients. In 2021 and 2022, Paya generated about $250 million and $283 million in annual revenue respectively.
Prior to acquiring Paya, Nuvei’s annual revenue in 2022 was about $843 million. Nuvei’s recent quarter’s financial performance indicates a robust trajectory considering the strategic acquisition of Paya. This acquisition has significantly contributed to Nuvei’s revenue stream and expanded its market footprint. The company’s revenue increased by 39% in the nine months ended September 30, 2023, compared to the same period in the previous year, primarily due to Paya’s contribution. Furthermore, the total volume increased by 62%, driven mainly by the Paya acquisition as well. This expansion reflects Nuvei’s successful integration so far and utilization of acquired assets to bolster its market position. However, despite the effort to integrate Paya, organic growth has been lacking. For 2023 full year, Nuvei forecasted total revenue of $1,180 million, which is about 4.8% higher than the total of Nuvei and Paya’s pre-acquisition revenue in 2022 of $1,126 million. 4.8% organic growth is barely on par with inflation for the same period.
The company’s focus on diversifying and enhancing its service offerings, particularly in the digital payment solutions sector, suggests potential for sustained growth. Nuvei’s strategic initiatives, including expanding its technological capabilities and exploring new market segments, are likely to support its growth trajectory.
Valuation:
Nuvei’s valuation, as of December 15, 2023, presents an intriguing perspective. With a market cap of approximately $3.3 billion, the company is currently valued at a multiple that is about 2.8 times its 2023 forecasted revenue and about 7.5 times its adjusted 2023 forecasted EBITDA ($430 million). This valuation is very conservative, especially when considering the company’s total assets of about $4.6 billion as of September 30, 2023, which suggests that the market is pricing Nuvei at roughly 71% of its book value. Nuvei’s competitor, Stripe, although a private company, was recently valued at $50-60 billion in 2023. Although Stripe boasts a revenue of about $14 billion in 2022, Stripe’s EBITDA is merely $100 million and is not currently as profitable as it appears. From this perspective, Nuvei’s share price should be much higher to be in line with its competitors.
For a technology and payment company, a valuation at these levels might imply a cautious market sentiment, likely factoring in the challenges of integrating Paya and the time it will take to recoup the amounts paid to Paya shareholders.
Prior to being acquired by Nuvei, Paya’s Adjusted EBITDA for 2021 was only about $65 million. The $1.4 billion consideration implied about 21 times the Adjusted EBITDA, which is significantly higher than what Nuvei is valued at currently. The overpayment is quite significant considering the challenging economic environment, especially in the technology sector. Nuvei’s management may have already regretted the price paid on this acquisition as Paya’s shareholders appear to have sued Nuvei for refusing to pay out the cash consideration.
If Nuvei successfully can capitalize on the synergies from the Paya acquisition and continue to demonstrate strong free cash flow generation, given the nature of economic cycle, the potential addressable market in the technology and payments sector, and Nuvei’s strategic positioning within it, its valuation could increase gradually to be more in line with its competitors.
Challenges:
Nuvei’s challenges are twofold: macroeconomic factors and company-specific issues. The global economic environment presents several challenges, including fluctuating foreign exchange rates and the impact of a dynamic interest rate environment. These factors have already influenced the company’s financial performance, as seen in the increased net finance costs ($30 million for Q3 2023 compared to $7.9 million in Q3 2022) and foreign currency exchange losses ($13 million loss for Q3 2023 and $12.5 million gain in Q3 2022). The uncertain global economic climate, marked by potential shifts in consumer spending patterns and regulatory changes, may also impact Nuvei’s operations.
Company-specific challenges include the integration of Paya, which has significantly increased the company’s operating expenses, particularly in selling, general, and administrative expenses. The increase in expenses related to commissions, employee compensation, and professional fees reflects the costs associated with integrating and leveraging the new acquisition. Additionally, the company faces the challenge of managing its increased indebtedness post-acquisition, which requires careful financial management to maintain liquidity and financial stability. Nuvei’s future performance will depend on its ability to effectively manage these increased costs and debt levels while capitalizing on the growth opportunities presented by the Paya acquisition.
Conclusion:
If one believes that Nuvei will successfully integrate Paya and fully leverage its earnings potential and synergies, it’s logical to consider Nuvei as significantly undervalued, presenting a strong investment opportunity. This perspective hinges on the expectation that the integration will enhance Nuvei’s market position, expand its capabilities in payment processing, especially in the B2B sector, and generate substantial financial and operational benefits. Such successful integration would likely lead to improved performance and growth, reinforcing Nuvei’s standing as an attractive investment choice in the fintech sector.
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