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“Best Buys Now” Pick #1:
Nuvei (TSX: NVEI)
In hindsight, we were wrong to be excited about buying Nuvei (TSX: NVEI) when it was trading for $155 per share. Clearly, a significant component of that stock price was hype-driven, cryptocurrency-oriented irrationality. (We at Stock Advisor Canada do our best to avoid hype-driven situations, but it’s easier said than done.)
Now, though, with Nuvei’s stock price going for less than $25, the hype has left the building. If anything, we’re of the mind that the market remains irrational with its treatment of Nuvei; however, at today’s price, it’s to the negative side.
Case in point: the market’s treatment of Nuvei’s second-quarter results.
On the surface, revenue increased 45%, which, admittedly, is a tad misleading. “Organic” revenue, which excludes contribution from “digital assets,” was up “only” 20%. EBITDA less capex — a rough measure of free cash flow — rose 19%. Also included in the press release was a modest downward guidance revision for full year 2023 and lowered medium-term growth targets for the next few years.
Our take was that the company’s long-term outlook remains as it was. The market, however, had a very different take.
Maybe management knew that investors wouldn’t like the revised guidance, and that’s why they announced the initiation of a US$0.10 quarterly dividend (about a 2.3% yield today). CEO Philip Fayer also said that, with the dividend now in place, he’d be forgoing any stock-based compensation going forward. In case you’re worried about Mr. Fayer’s ability to keep his heat on this winter, that still translates to about US$11 million in dividend payments annually.
However, low dividend yields are not exactly what your average growth investor is generally seeking; indeed, initiating dividends is often taken as a sign by outside investors that the “rocket ship” growth they’ve been hanging their investment case on isn’t coming back. And in fact, the growth investors have exited Nuvei en masse. The stock is down by ~40% from where it was before the earnings release.
Admittedly, this isn’t a business we’ve necessarily fallen more in love with over the past few years. Payment processing is a competitive industry, although it’s big enough that many players can succeed. We’re more of the opinion that just as the market was wrong to price Nuvei at $155 per share, it’s potentially just as wrong to price it at $25.
Time will tell if Nuvei’s business will ever again be worth what it was. We’re comfortable suggesting, though, that it will be worth more than it is today.
