This year, some tech stocks soared as phoenixes from the ashes of the 2022 tech bubble burst. Among those was Nuvei (TSX: NVEI), whose share price soared as much as 65% this year after losing 80% of its value in the bubble burst. Generally, growth stocks like Nuvei fall in a high-interest environment as fixed income steals the thunder from the stock market. But Nuvei stock surged because of an acquisition that opens a whole new growth avenue for the payments platform.
However, the latest earnings cooled this fire and pulled the share down 25% in May. Is this dip an opportunity to buy into a high-growth stock or wait for the stock to fall further?
The stock market runs on investor sentiments (greed and fear) in the short term and fundamentals in the long term. Therefore, you need to know which of the two reasons was responsible for the rise and fall of the stock price.
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Why did Nuvei stock surge 44% in February and March?
The sharp jump in Nuvei stock between February and March happened after it completed the US$1.3 billion acquisition of Paya, an integrated software and payments platform.
Nuvei is a native commerce platform that depends heavily on e-commerce for 90% of its transaction volumes. It has a presence in other verticals like digital products, regulated sports betting, and cryptocurrency exchanges, but even they are cyclical.
Paya’s unique selling proposition is its integrated solutions that can be embedded in ERP. Enterprise resource planning (ERP) systems are used by large enterprises with a global presence and high workflow.
By adding Paya’s technology to its commerce platform, Nuvei can now reach out to large corporations across different verticals and help them ease their global payments. Paya already has a presence in business-to-business goods and services, healthcare, utilities, government, non-profit, and education. All of these are under-penetrated non-cyclical verticals.
Recently, Nuvei became the preferred payments partner for Radisson Hotel Group, which has more than 1,100 hotels in operation and under development in Asia Pacific, Europe, the Middle East, and Africa. Nuvei also became the preferred partner for Virgin Atlantic, Air Transat, Westjet, Scott Dunn, LastMinute.com, Sabre, and Selina Hospitality.
Targeting large enterprises can make Nuvei’s platform sticky and stabilize its revenue by diversifying across several verticals and enterprises. Investors got excited about this value proposition and started buying.
So what happened in May to make the stock slip?
Why did Nuvei stock plunge 25% in May?
The current environment of high-interest rates and growing concerns around the U.S. economy plunging into a recession made investors risk averse. Investors started avoiding companies with high debt, and Nuvei increased its debt to US$1.3 billion and reported a loss of US$8.3 billion in the first quarter because of the one-time financing cost for the acquisition.
Because of Nuvei’s global presence, it was unaffected by the failure of three U.S .banks in March. But a recession in the U.S. will affect the stock. A recessionary environment pulls down all economic activity including buying, selling, lending, and investing. A recession directly impacts a company that earns its revenue from volume transactions. In a weak revenue environment, this debt could put pressure on Nuvei’s profits. Many tech companies don’t take much debt, as revenues are cyclical.
Then why did Nuvei take this risk? Because it expects non-cyclical stable revenue from Paya’s client base could give it sufficient cash flow to service debt. If it wasn’t for this debt, Nuvei stock could have maintained its rally.
Is now a good time to buy this stock?
In an ideal scenario, Nuvei is a good stock to buy as it is currently undersold and on the brink of a new growth chapter. But the macroeconomic uncertainty changes things, as the stock could fall further if the recession materializes. The stock could even surge 40–50% if the economy averts a recession.
If you are willing to take risks, buy some Nuvei shares while it trades below $45 and some more if the stock falls below $35. The stock has the potential to rally on recovery.
