Repay Holdings: Strong Underlying Growth Tailwind (NASDAQ:RPAY)

Investment action

Based on my current outlook and analysis of Repay Holdings (NASDAQ:RPAY), I recommend a buy rating. I expect growth to recover back to the mid-teens level as the underlying growth tailwind is too strong to be held down permanently. As the macro environment recovers, which seems like it is based on how inflation has trended and feds signal to cut rates, growth should return.

Basic Information

RPAY is a payments technology company that provides integrated payment processing solutions to key vertical markets, including personal loans, automotive loans, mortgage servicing, receivables management, and B2B. To put it simply, RPAY enables businesses and consumers in these verticals to make payments using electronic payment methods instead of cash and checks. The business has shown positive top-line growth for the past 6 years, growing revenue from ~$50 million in FY16 to $280 million in FY22. A better metric to assess the growth and size of the business is by looking at the total card payment volume processed. RPAY processed a total of $4.3 billion in FY16, and this figure has grown by 6x to $25 billion in FY22, a CAGR of 34%. That said, RPAY has certainly used its balance sheet to fund this growth, as its net debt position has increased from ~$80 million in FY18 to ~$400 million in FY22.

Growing industry with secular tailwinds

RPAY has a presence in key markets that give it access to a large addressable market: auto, mortgage, and personal loans, as well as business-to-business [B2B] payments. Collectively, these markets sum up to more than $5 trillion in addressable payment volume. From a revenue perspective, this translates to a total revenue market size of $80 billion, assuming a 1.16% revenue take rate (RPAY’s 3Q23 take rate). Using that $80 million as a base, it implies that RPAY only has less than 1% of market share, suggesting plenty of room for growth.

So we have over a $5 trillion addressable — total addressable market that we are made up of both the consumer side and the business payment side, and we see the large unaddressed solutions in the marketplace on how automation is happening. JPM conference

The key growth tailwind and driver for RPAY is the growing penetration of card payments in these key markets. While card penetration of overall US consumer spend reached 70+% (both credit and debit cards), verticals like mortgage and personal loans ranged from less than 10% to 20%, and auto loans are still below 50% penetration. I expect these penetration rates to continue going up as the value proposition of paying using electronic methods is strong. Compared to using cash and checks, electronic methods are faster, more secure, and easier to track.

The B2B market represents another large market that extends the growth runway of RPAY. According to Visa, the B2B market has an addressable market size of around $120 trillion. Of these $120 trillion, RPAY is targeting about $3.4 trillion (4Q22 earnings) of it (mainly capturing share from the conversion of cash and check payments to electronic payments). Based on third-party research, 81% of US firms are still using paper checks to settle bills, and assuming B2B will catch up to the same penetration level as consumers, it means huge growth ahead for players like RPAY. RPAY execution here has been great; the business has strategically positioned itself in the B2B market, growing its B2B business from 0% prior to its first B2B acquisition in 2019 to 20% of the business today.

We see that it flows opportunity is $185 trillion annual opportunity, and we break it into two primary subjects. One is B2B, which is about $120 trillion, and the remaining is P2P, B2C, B2 what we call little b and or small business and government to consumer, and that’s the other $65 trillion. Visa Inc: Autonomous Research Virtual Annual Future of Commerce Symposium

Enables payments from multiple channels

Even though RPAY can handle ACH, credit, and debit transactions, what sets them apart from the competition, particularly when it comes to managing accounts receivable and loan repayments, is the variety of payment channels they provide. Customers have the ability to make payments at any time, day or night, with RPAY. Online, via a mobile app, text-to-pay, over the phone with Interactive Voice Response technology, and at the point of sale terminal or kiosk are all ways that RPAY accepts payments. In my opinion, RPAY’s ability to accept a wide variety of payment methods helps it attract new customers and encourages current ones to use more electronic payment options. In addition, RPAY also has strong integrations with multiple software partners, growing from 16 integrations to 257 integrations as of 3Q23. This effectively equipped RPAY with the necessary capabilities to penetrate niche markets (e.g., fine dining restaurants) via a capital-light model. In other words, RPAY can get organic leads from the software partner that addresses fine dining restaurants (i.e., the software is catered to fine dining restaurants that need to track inventories or customer profiles meticulously, etc.).

Direct sales model

Finally, I think a very interesting aspect of RPAY is that it uses direct sales force. Instead of working with software partners as resellers, RPAY uses a referral model where software partners directly sell to RPAY’s potential customers. The referral model does double duty: it gives RPAY more say over its relationships with end users while simultaneously supporting RPAY’s margins by reducing the revenue share that RPAY’s software partners receive compared to the industry average.

Valuation

I believe RPAY will revert back to its 15% organic growth rate over the next 2 years, as the secular tailwind is too strong to be held down permanently. I do acknowledge that the weak macro environment has a negative impact on card, digital, and electronic payment penetration, as businesses are not going to prioritize this shift today. However, the value proposition and overall cost savings make it a lot of sense to switch eventually. I expect RPAY to grow to mid-teens over the next 2 years, as the business has grown to mid-teens organically before this macro turmoil. I did not model a large step-up in margins, as I expect management to reinvest excess savings in growth. I think there is a viable path for RPAY to see its valuation multiples re-rate upwards as growth returns to mid-teen, but given how the macro environment is, it is a tough call to make that assumption (unless rates fall back to 2% next year, making the equity market more attractive). Nonetheless, even if valuation does not expand, I think the upside is still quite attractive at the current 7.5x forward EBITDA multiple.

Risk and final thoughts

As I mentioned, the macro slowdown has had a negative impact on RPAY, and this negative impact could get worse if rates go higher, inflation reaccelerates, and wages remain high. All of these will increase the cost of capital for businesses. The implication is that it will drive more companies out of business as their P&L/balance sheet cannot sustain the higher cost of operation and also cause businesses to further cut back on any reinvestments (i.e., shift from card/cheque to card/digital/electronic payments).

I am recommending a buy rating for RPAY. The company addresses a large market of more than $5 trillion, and RPAY’s successful penetration into these markets, coupled with the growing trend of electronic payments, should drive long-term growth. Moreover, RPAY also targets the B2B segment, which has an addressable size of around $120 trillion, further extending its growth runway. The company’s diverse payment channels, direct sales model, and robust integrations contribute to its competitive advantage.