Mogo is almost a double from here, says Eight Capital

Canadian fintech company Mogo (Mogo Stock Quote, Chart, News, Analysts, Financials TSX:MOGO) just delivered a solid quarter, according to Eight Capital analyst Suthan Sukumar, who reviewed the numbers in a client report on Thursday. Sukumar said, the market is currently failing to consider the full value of Mogo’s interest in digital trading platform Coinsquare, which the analyst thinks could one day become a majority stake.

Vancouver-based Mogo is a mobile-first digital banking company whose Mogo app allows users a range of products and solutions including personal loans, cryptocurrencies, mortgages, credit scores and a digital spending account in Mogo Visa Platinum Prepaid Card. Mogo released its first quarter 2021 financials on Thursday, featuring revenue of $11.4 million, down 18 per cent year-over-year but up 14 per cent sequentially. Adjusted EBITDA was a loss of $1.1 million compared to positive $0.5 million a year before and the net loss for the quarter was $2.8 million compared to a loss of $10.1 million a year earlier and a loss $2.8 million for the Q1 2020.

The company said the sequentially higher revenue was driven by increased results from MogoCard and MogoCrypto and the recognition of revenue related to payments processing, while the drop in earnings was primarily attributed to an increase in product and technology investment along with greater marketing spend. The reduction in net loss compared to last year was chalked up to a $5.8-million gain in Mogo’s investment portfolio which itself stemmed mostly from gains in Mogo’s investment in Vena Solutions, which was sold subsequent to the quarter’s end.

Mogo made a number of noteworthy moves over the first quarter and subsequent to then, including an $87.5-million net cash proceeds equity raise and the completion of early conversion of convertible debentures. On the M&A front, Mogo closed in January on the acquisition of digital payments company Carta Solutions, followed by the sale in April of Vena Solutions for $4.7 million (representing a 116-per-cent increase from its book value at the end of 2020) and the completion of an initial strategic investment in Coinsquare, a 19.99-per-cent stake, which the company plans to increase to 37 per cent through a secondary transaction (announced on May 13). Finally, in May, Mogo completed the all-stock acquisition of Canadian saving and investing app Moka.

In the Q1 press release, Mogo CEO and founder David Feller called the quarter “among the most active and strategically important periods in Mogo’s history.”

“We are building the most comprehensive digital wallet to address the needs of Canadian consumers, and the transactions we completed in the first quarter – both strategic and financial – accelerate our growth plans and vision significantly,” Feller wrote.

“We are seeing momentum across multiple areas of the business and, with the upcoming addition of new investing and saving options, a free stock trading solution and P2P payments in 2021, we will give Canadian consumers even more reasons to make Mogo an important part of their financial lives,” he said.

For his part, Sukumar had estimated Q1 revenue and adjusted EBITDA of $10.9 million and negative $1.0 million, which compared to the actual $11.4 million and negative $1.1 million, respectively, while the consensus call was also for $10.9 million and negative $1.0 million, respectively.

“The revenue beat was led by subscription and fee-based revenues, which accelerated with 32-per-cent quarter-on-quarter growth, reflecting initial contribution from B2B payments with the recent Carta acquisition. Further, momentum with the Mogo platform continues to build with the third straight quarter of acceleration in new member adds (+70k, +52 per cent year-over-year) and growing engagement evidenced by transaction volume growth in key product initiatives: MogoCrypto (+1,500 per cent year-over-year) and MogoCard (+1,000 per cent year-over-year),” Sukumar wrote.

The analyst noted that Mogo added 70,000 new members over the Q1 versus 52,000 in the fourth quarter 2020 and 46,000 in the Q1 2020, putting its total customer base at 1.2 million or 1.6 million inclusive of the Moka acquisition.

Sukumar said the market has yet to account for Mogo’s stake in Coinsquare, which should hit 48 per cent.

“Applying Mogo’s stake, assuming exercise of a remaining share purchase warrant for a total 48-per-cent ownership at an incremental cost of ~$60 million, yields a per share value of >$7/share for their Coinsquare investment. This is effectively close to where Mogo trades at today, reflecting nearly zero value in the stock for Coinsquare, in our view,” Sukumar wrote.

“Further, we see a path to a majority +50-per-cent ownership, which would consolidate financials for both companies, with potential for Mogo to ultimately be the public exit vehicle for Coinsquare, suggesting further valuation upside,” he said.

Sukumar estimates that Mogo currently trades at 8x his 2022 net revenue forecast compared to its global fintech peers at 10x (with Square at 15x) and its payments peers at 14x.

With the update, Sukumar has reiterated his “Buy” rating on MOGO and $16.00 target price. Representing a projected one-year return of 88.7 per cent at the time of publication, the target currently implies a 15x multiple of 2022 net revenue, which the analyst said is a premium to fintech and payments peers so as to reflect upside from additional M&A.