Description

A PROXY FOR COINBASE AT A FRACTION OF THE PRICE

MOGO is a leading Canadian Fin-tech company that owns a 20% stake in Coinsquare, the "Coinbase of Canada".  The largest holder (also a BOD member) of MOGO is Michael Werkerle, one of the most successful, colorful, and savvy investors in Canada.  Despite a very nice run in the stock, Werkerle has never sold a share.  The timing for this idea is perfect, on the heels of crypto's rise and the IPO of Coinbase (Nasdaq: COIN). 

MOGO shares offer up to 100% upside from current levels, and possibly more if Coinbase "mania" sets in.

What is Coinsquare?

Coinsquare acts as the trading platform for MogoCrypto, which Mogo first launched in 2018.

As of January 2021, Coinsquare had $355m USD in AUM and trading volumes in January 2021 were over $400m USD.

Since Coinsquare is not public, we don't know what AUM is today.  However, if we extrapolate their growth based on comparable Voyager Digital's (CNSX: VYGR) publicly reported growth in Feb and March of 2021, we conservatively arrive at AUM of around $750m USD.

MOGO agreed to purchase a 20 percent equity stake in Coinsquare in Feb 2021. Under the terms of agreement, MOGO made an initial investment of $56.4 million CAD in exchange for 19.99 percent equity in Coinsquare.  The agreement also includes the ability for MOGO to acquire an additional 20 percent ownership interest in Coinsquare. This will be done through the acquisition of shares from current shareholders and the exercise of warrants under certain conditions for consideration, and is based on Coinsquare having a pre-money valuation between $250 million and $350 million.

Based on the valuation of Coinbase (COIN), which went public this evening, and the valuation of Voyager (CNSX: VYGR), we believe the value of Coinsquare represents at least 50% of the per share value of MOGO.

Illustration:

To put this into context, in January 2021, Coinbase (COIN) held around $40b in assets under custody.

When the stock opens for trading on 4.14.21, it could have an Enterprise Value of up to $100b or more (2.5x).  Some are calling for even higher numbers.

Some History on MOGO

MOGO went public in 2015 at $10/share as a direct lender platform for consumers.  By mid 2017, the MOGO app would become available on both iOS and Android.  Members have grown from 186k in 2015 to over 1m today, and 1.5m if you include recent acqusitions.

Over the years, MOGO added a host of additional products such as free credit scores (first to do this in Canada), mortgages, identity fraud, and the ability to buy and sell crypto. MogoSpend allows auto-transfers from customer accounts to the Mogo Prepaid Card which to help users set monthly budgets/spending goal, which translates into recommended daily budgets to keep members on track.

At the onset of 2020, MOGO began to pivot away from direct lending, and initiated a partnership with Go-Easy, who acquired the MogoLiquid Portfolio for total gross consideration of $31.9 million. The proceeds of the sale were used to repay one of Mogo's credit facilities which has an outstanding balance of approximately $28.7 million with the remaining proceeds used to further strengthen Mogo's balance sheet and support its growth initiatives. The partnership enables MOGO to earn subscription and service/platform fees.  MOGO uses none of its own capital under the arrangement and takes no credit risk on loans.

Pre-Covid, the platform was adding around 19-20k new members per month.

A HOST OF FINTECH ACQUSITIONS

CARTA

In Nov 2021, MOGO announced a deal to acquire 100% of Carta Worldwide, a software provider that offers digital transaction processing, specializing in mobile and prepaid transactions for ~ 3x sales (in an all stock deal).  Carta offers merchant services, prepaid solutions, host card emulation, Cloud and Secure Element, and Tokenization (data security).  85% of Carta’s customers are outside of Canada. MOGO saw the acquisition as strategic in that it was able to accelerates its transformation to a broader digital wallet and payments technology business with the ability to cross-sell MOGO’s  front-end digital platform to provide enhanced value to customers.

There is no questions that the payments space is white hot.  Three major fintechs –SoFi, Coinbase, and MoneyLion announced their plans to go public along with rumors that Stripe and Klarna will follow.  Just this week, Marqeta filed paperwork to come public.  The price to revenue range of these companies is all over the map, however none of them are in the single digits.      

COINSQUARE - THE JEWEL

As explained at the onset of this write-up, On Feb 11, 2021, MOGO announced a deal to acquire 20% of Coinsquare, a Canadian cryptocurrency-trading platform, for US$44.4 million ($56.4m CAD).

The $56.4m will was financed as follows: (~$30 mln in Mogo shares (equated to around 1.95 mln shares at the time) and remainder in cash.

There is no doubt that Coinsquare is the Coinbase of Canada.  The deal MOGO did effectively locks up almost half of Coinsquare’s equity at a fixed price. Again, this is a business that is roughly half the size of Voyager Digital, which has a $4.6b CAD market value.

Assuming an initial equity investment of 20% plus the exercise of additional options to get to 40% ownership, the implied net value to MOGO shareholders of Coinsquare is $354m USD, or $5.64 per MOGO share (using 62.8m fdso).

MOKA

In late March, MOGO announced yet another deal - the acquisition of MOKA, a leading Montreal based Canadian Fintech company with 500k users, 100k of which are on monthly subscription.  Similar to apps like Acorns, MOKA is a one stop shop easy automated saving and investing, bill lowering, cash back perks, and financial coaching.  To pay for the acquisition, MOGO issued 5m shares of stock and assumed $3m of debt.  The acquisition made a ton of sense - it will allow Mogo to sell savings and investment products into its existing 1.2M members as well as sell legacy Mogo products nearly half a million new MOKA members. 

MOKA is often compared to Wealthsimple, a leading Fintech asset manager in Canada, the provider of Canada’s most popular stock trading platform in Wealthsimple, and backed by one of the nation's richest families.  Wealthsimple recently raised money at a $1.5b CAD valuation.

It is expected that MOKA will come to serve as the cornerstone of MOGO’s wealth management platform, which is expected to include commission free single stock trading by the end of this year.

SHAREHOLDERS

In addition to Werkerle, MOGO's other largest holders are CEO David Feller and his brother, CFO Gregory Feller.  These three individuals own almost 16% of the Company and have never sold a share.  Fortress is the fourth largest holder at 2.4%.  Unlike many Canadian issuers, MOGO saw the value of listing on the NASDAQ and did this in 2018.  Management is accessible and savvy.  They are here to create a ton of value in Canadian Fintech, and are very much entrepreneurs, not bureaucrats.

PUTTING IT ALL TOGETHER

Buy a share of MOGO and back out Coinsquare:

We are paying $194m for everything else.  Note that the Cash and Investments portfolio includes some legacy investments that the Company has publicly stated they are harvesting - and that are conservatively marked.  Don't put any extra value on this.

For $194m, we are paying (3.7x - 4.4x) EV/REVS for Core MOGO, Carta, and MOKA.

These businesses should do $45-$55m USD in sales in the next 12 months.

Unlike a lot of Fintech companies (the space trades at 13-20x sales), MOGO's suite of entities should actually have break even andjusted EBITDA in 2021 and $4m or more of EBITDA in 2022.  The biggest knock against MOGO is that its close to or at profitability -- growth investors like their Fintech cos to lose lots of money and get big EV/Sales multiples it seems.

At 10x the low estimate on sales MOGO is worth $8 + $5.60 for Coinsquare, or $14.60 -- you make 40%

At 15x the high estimate on sales MOGO is worth $13 + $5.60 for Coinsquare, or $18.60 -- you make almost 100%

If Coinbase goes parabolic you make even more.

Each of MOGO's divisions should show nice growth in users and sales, and the Company has ample cash to execute on its strategy.

Obvious risks include a crypto crash (though this is a picks and shovels player, it will certainly be tethered to crypto prices), and failure to integrate the various acquisitions.

Catalyst

Watch the Coinbase IPO

MOGO exercises option to buy more Coinsquare

Wealthsimple decides it needs to own MOGO