Today we deep dive into $PAYO (The Rundown #177)
Payoneer Global is Integral to the Future of the Creators
Payoneer went public earlier this year through a SPAC merger with FTAC Olympus at an implied valuation of $3.3 Billion. With the broader SPAC market falling out of favour with investors, some companies show significant promise trading at a substantial discount.
Payoneer is a bet on the future of digital payments and the creator economy with multi-decade growth ahead. Despite revenues growing 30%+ over the last five years, the company hasn’t seen the same enthusiasm as peers like Square and Paypal.
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The Gold Rush of the 21st Century
The pandemic has introduced Induced a structural shift in the job market with younger, higher-skilled professionals seeking flexible alternatives to traditional employment. More than a third of the American workforce is now comprised of freelancers with freelance work contributing $1.2 trillion to the US economy. The combination of the switch to remote work along with the historically high employee turnover for millennials and Gen Zs over the last year has resulted in a surge of freelancing activity.
Freelancing has also offered flexibility and cost advantages to employees with the prospect of buying as much or as little help as needed on demand. With so much uncertainty going around, employers are preferring handing out contract jobs over full-time employees which keeps overheads down when the overall demand is lower.
Just as there has been a surge in demand for freelance workers, similarly, the number of freelance platforms that connect gig services to employers have exploded in popularity. There are hundreds of platforms on offer, with the leaders being Upwork, Freelancer, and Fiverr.
It is practically impossible to bet on which platform will ultimately reign supreme. History teaches us that when everyone is looking for gold, rather than dig for gold, it’s best to start supplying shovels. Back in 1848 at the height of the gold rush in California, out of the 300,000 would-be miners who came to make their fortune, only a handful profited.
But large fortunes were made by an ecosystem of products created around the gold rush, with companies like Levi Strauss, Armour Meat Packing and the Studebaker company selling miners food, clothing, tools, camping goods and other necessities. The freelance revolution is just like another gold rush, but the real innovation isn’t just the work of freelancers or the platforms that enable them.
The real innovation comes from the ecosystem that supports freelancers and SMBs. One of the important dynamics in that ecosystem is how the money flows, the financial services that support and expand the freelance revolution. Payoneer is a pioneer in freelance financial services and is set to majorly benefit as the freelance industry continues to grow in size, value and importance.
Monetising The Talent Revolution
Payoneer was founded in 2005 to offer freelancers and their platforms access to sophisticated financial services that meet their business needs. The company currently provides a platform for over five million enterprises and SMBs in 190 countries. Payoneer provides a comprehensive financial product suite that includes cross border payments, multi-currency accounts, merchant services and tax solutions.
Payoneer has differentiated itself from peers like Square and Paypal through streamlined integration with marketplace ecosystems. The company provides several payment options for marketplace ecosystems allowing for money to be deposited into a Payoneer account, mobile wallet and bank wire transitions. The company works with 9 of the top 20 most valuable marketplaces in the world. Payoneer plans to leverage its market momentum and scale to extend leadership within the marketplace ecosystem.
In addition, the company works to connect global banks and offers a regulatory infrastructure, compliance and manages risk for businesses. Payoneer aims to expand its products in the future by ramping up merchant services, working capital and card growth platforms, through substantial investment in the surrounding infrastructure. Furthermore, Payoneer is planning to pursue inorganic growth through strategic M&A with over $500 million in cash at the end of Q2.
Strong Rebound in Payments
Payoneer is on track to meet its guidance for payment volumes and revenues this year. The firm expects payment volumes in the range of $62-$64 billion, revenues close to $450 million and expects to be EBITDA positive. These numbers imply that volumes are expected to surge 50% YoY, with revenues growing close to 30%.
This implies that Payoneer remains on track to meet its revenue growth targets of 20%+ EBITDA margins of 20%+. Payoneer continues to benefit from strong network effects where revenues from existing customers scale over time with the scale of the platform drawing more customers over time. Cohort continues to grow volumes with 90%+ retention rates and continues to benefit from a surge in the creator economy.
Ultimately, Payoneer expects strong retention, explosive growth and network effects to massively scale revenues over time. Consensus estimates indicate that Payoneer could see revenues of $560 million in FY22 and $750 million in FY23. Payoneer is trading close to $10 with approximately 338 million shares outstanding. Looking at the options, warrants and share lock-ups, shares could grow to 360 million.
This implies a $3.6 billion valuation, which suggests that the stock is trading close to an 8x forward revenue multiple. If you exclude the $500 million in cash, the stock is trading closer to a 7x multiple, which is substantially cheaper. While comparable companies like Paypal, Square and Shopify are trading well over 30x revenues with similar growth projections, Payoneer is a heck of a deal at a fraction of the price.
Despite the optimism surrounding the momentum in earnings and payment volumes, there are some signs to look out for moving forward. As the completion for global payments intensifies, companies like Square, SoFi, Paypal and Shopify have all begun competing in high-value services, which will likely bring down margins in the future.
This was evident in 2020 when Payoneer’s take rate tanked from 1.1% in the prior year to only 0.78%. Management now expects the take rate to be around 0.65%, which indicates substantial pressure from competing rivals.
Payoneer is a bet on the exponential growth that lies ahead in the creator economy. With significant network effects, strong retention and payment volumes, Payoneer are well poised to take on competing firms like Paypal, Square and Shopify.
While the market continues to discount the growth ahead with Payoneer, the situation provides a great opportunity to buy into the future of payments at a fraction of the price, with significant upside ahead.