Description

PAYO Investment Thesis: Payoneer has built a global financial platform that spans 190+ countries & territories, with 5M+ marketplaces, enterprises & SMB’s using the platform across 7,000+ unique trading corridors, processing 300,000+ new customer applications per month and $40B+ in annual volume for clients such as Amazon, Airbnb, eBay, Fiverr, Google, Homeaway, Rakuten, Taboola, Upwork, and Wish. They sit at the nexus of several prominent macro tailwinds including the growth of B2B digital commerce, Cross-Border (“XB”) eCommerce, marketplaces, platforms, the freelance economy, and the complexity of 600+ APM/LPMs.  

PAYO went public via a merger with Betsy Cohen’s FTAC Olympus Acquisition corp announced in February (closed at the end of June) & has flown under the radar given the carnage in the SPAC market. Other recent companies exposed to cross-border eCommerce / payments such as DLO & GLBE have more than doubled in the past two months from their IPO price as investors look for a way to gain exposure to the growing trend of XB eCommerce. It currently has a $3.7B market cap / $3.2B EV trading at 7.5x / 6.0x ‘21E / ‘22E EV/S & 14.9x / 10.8x ‘21E / ‘22E EV/GP compared to FinTech / payment peers at 23.4x / 17.0x and 47.1x / 34.0x respectively, despite attractive end-market tailwinds & above peer growth. 

Macro Backdrop: 

PAYO is the middle of three large global trends (i) Digitalization is Accelerating (ii) Cross-Border eCommerce Growth & (iii) Marketplace & Platform Growth 

Digitalization:

Global digital commerce has grown 10% annually, from ~$16T in ‘13 to ~$26T in ‘18. B2B digital commerce is even bigger than retail e-commerce and has grown even more quickly than consumer e-commerce, with B2B digital commerce expected to be $35T by 2022.

Cross-Border eCommerce

The COVID-19 pandemic has accelerated the multi-decade transformation of retail from offline to online; serving as the final catalyst for merchants to divert attention & resources from traditional storefronts to online channels. According to eMarketer, global eCommerce was expected to be $3.9T in ‘20 accounting for ~17% of total retail sales. Global online penetration is anticipated to grow to approximately 21%, leading to $5.8 trillion in e-commerce sales by 2023, a 13% CAGR from 2020. Cross-border e-commerce is expected to grow at a 14.7% CAGR from ‘20- ‘27.

Shoppers’ buying habits are not only rapidly shifting towards online but trends and consumer tastes are also turning increasingly global, driving cross-border online volumes; Forrester expects that by 2023, the cross-border e-commerce market will reach $736 billion.  This trend is further accelerated by the rise in social media, which has created a significant marketing channel for merchants to reach new audiences in foreign markets through targeted ads and influencers; the top 10 Instagram influencers reach nearly 1.6 billion potential shoppers. According to research by 5WPR social media influences the purchasing behavior of 72% of individuals between the ages of 18-34.

Marketplace & Platform Growth

It’s not just eCommerce / cross-border eCommerce but the growth in marketplaces more broadly. Marketplaces and platforms represent over 57% of consumer digital commerce in 2019, according to Digital Commerce 360, growing faster than digital commerce in general. 

The Amazon third-party seller ecosystem has been growing vertically, now accounting for ~58% of AMZN’s total retail sales with ~$200B in GMV in ‘20 expected to hit $400B by ‘23E. The ecosystem is made up of hundreds of thousands of sellers earning $25K-$100K of revenue, with in excess of 2M active sellers on the platforms and hundreds of thousands of new sellers added each year. 

Airbnb has 4M+ hosts across 220 countries & regions around the world, servicing 825M+ guests, who have earned $110B+. 

Wish has 100M MAUs across 100+ countries, who have purchased 640M+ items across 500K+ merchants. 

Upwork’s marketplace saw in excess of $2.5B of GSV with hundreds of thousands of freelancers, completing millions of projects, for hundreds of thousands of clients across 180 countries. 

All of these marketplaces & their two-sided networks (merchants / freelancers / hosts / vendors / clients) have complexities involving payments, taxes, FX conversion, etc… all of which PAYO solves. 

Payoneer Overview: 

The Payoneer payment solutions make it possible for a US marketplace to pay their sellers in over 190 countries and territories by simply connecting to Payoneer APIs and making a local payment in the US. 

For sellers, their payment solutions allowed them to get paid quickly, reliably, and cost-effectively. Payoneer enables  customers to create and send invoices, pay and get paid through a wide range of local and global payment methods, all geared towards B2B. 

The Payoneer platform offers a global, multi-currency account to businesses of any size from nearly every country. When a marketplace connects to Payoneer, they have global access to more than 80 banks and payment partners, providing clearing & redundancy in over 100 countries, with payout capabilities in 190 countries 

PAYO connects & monetizes two-sided networks building a unique flywheel where their solution attracts more marketplaces, in turn attracting more SMB’s, creating a self-reinforcing cycle that drives growth. Network effects also drive unique value for customers and create greater stickiness with existing customers. For example, PAYO has developed services that enable SMBs to transact more efficiently through Payoneer when both parties are Payoneer customers.

Payoneer recognized the importance of offering services to both sides of this two-sided commerce networks. They knew that marketplace sellers were SMBs that would need much more than just payment solutions in order to grow — they had all the same needs as other more traditional businesses, including managing their operations and employees, sourcing from suppliers, accessing capital, and acquiring customers. They needed to do all this in a geographically agnostic way. 

They built a broad ecosystem of marketplaces, sellers, gig workers, merchants, manufacturers, banks, suppliers, buyers, etc... Today, they serve over 5 million SMBs and thousands of digital enterprises. 

They partner with companies across a variety of categories, including ERP systems, logistics providers, sourcing platforms, tax providers, etc...These partners provide value-added services relevant for network participants and often accept payments directly from their customers’ Payoneer accounts, simplifying cross-border trade.  In 2020 they introduced Payoneer for Banks, a way for banks, mobile wallets and payment companies around the world to integrate to Payoneer APIs and embed Payoneer in their local online banking and mobile platforms for their customers

They have a robust client onboarding process & have won deals due to their KYC capabilities alone, as marketplaces need PAYO to perform KYC on the small businesses they are onboarding. This data becomes a huge asset for them.

They offer a product suite including:

• Global Payments

• Multi-Currency Accounts

• Physical & Virtual Cards 

• B2B AP/AR

• Working Capital

• Merchant Services

• Compliance & Risk Services

• Tax Solutions

Ecosystem Lock-In

PAYO has ~100%+ volume retention with clients, but even more so than that there’s strong ecosystem lock-in as it’s very rare that a marketplace will remove Payoneer out of their platform as a method of payment. There's no reason for Airbnb to say, "Payoneer is not an option on our site anymore,” they may add another provider, but it's really unlikely that they will remove it. Due to demand from hosts who already have accounts set up

Seller Value Proposition:

In the last few years, we’ve seen many sellers in the U.S. are selling on more than 1 marketplace, including non-U.S. marketplaces. Consolidating cross-platform marketplace sales, including those from eBay, Amazon and Walmart, Wish, etc... into a single location is a big value driver. 

If you are an SMB selling on AMZN, EBAY, and Wish, ordering additional inventory for your Amazon store using funds from your eBay store can get complicated if you don’t have all your financial details in one place. The same can be said if you want to analyze and compare sales stats and revenues between your Walmart and Lazada stores. 

Payoneer serves as a central location enabling sellers to receive Amazon, eBay, Walmart and other marketplace payments to a single platform, gaining a comprehensive overview of their current financial situation, including which stores are performing well and which require additional resources. 

Sellers are able to use the funds in their account across countless different ways including:

• Make business payments – Use funds in the Payoneer balance to pay suppliers, contractors or other business partners. Payments to other Payoneer customers are free. 

• These can be cross border payment seamlessly paying vendors in different countries with different currencies. 

• Pay your VAT – Make VAT payments directly from Payoneer balance for free

• Convert funds – Convert funds into a wide range of currencies at leading market rates.

• Withdraw funds – Withdraw funds to local bank accounts in local currency.

• Access working capital – Payoneer’s working capital solution, Capital Advance, offers access to multiple funding options, with different working capital offers and settlement terms. 

Marketplace Example

Airbnb

If you are a homeowner you can come to Airbnb, and choose to have a Payoneer account, receive your funds to your Payoneer account or you can receive your funds to your local bank account. If you are living in NY and have an apartment in Greece that you Airbnb you want to receive USD, but the listing is in Euro’s, and you need to pay someone to clean / fix your apartment in Euro’s, and you want to buy furniture in Euro’s. You can send all these funds to service providers in Euro’s and hold the rest in USD, all using Payoneer. 

Business Model:

PAYO has attractive unit economics with annual net volume retention over 100% and payback period of less than 12 months.

Because PAYO sits in the center of a two-sided network as an intermediary, they have the opportunity to earn fees on the way in, earn fees on the way out, and offer additional value-added services along the way. 

Their goal is to drive customers and volume onto their platform, and once on the platform they create utility through additional products and services; volume growth is their northstar. They are able to drive growth via organic growth from existing customers, new customers, up-sell new services, and expand their sales team / partnerships. 

The majority of their revenues is a take rate as a % of volume. Their blended take rate is a composite of their different businesses and products that vary across customer demographics and geographies; but is expected to be ~68bps in ‘21E on $64B of volume driving $432M in ‘21E revenue. 

We manage our blended take rate to drive higher margins and more favorable customer mix shifts which allow us to sustain strong overall revenue growth rates while maintaining attractive transaction profit margins

Client Consensus Growth: Many PAYO clients are growing well in excess of GDP overall, with their B2B eCommerce / marketplace businesses growing even faster than the overall businesses which should support ~20%+ revenue growth for PAYO for the foreseeable future (management has guided to ~20%+ revenue growth & 20%+ EBITDA margins). 

Competitors:

If you ask the company who their biggest competitors are, it's largely players in China that are looking to solve this problem. PayPal acquired a company called Hyperwallet that was targeted towards the freelance space but has lost share post acquisition. Stripe is looking to offer solutions for marketplaces but has limited global reach today, and companies like PingPong, and World First are also targeting different verticals. 

PT / Valuation:

PAYO should be able to sustain high-teens to low-twenty percent top line growth over the next 10 years resulting in ~$2.0-$2.5B in ‘30E revenue and $400-$500M in EBITDA. The legacy processors that are growing at GDP+ still command mid-to-high-teens EBITDA multiples which can support a ~15% IRR from current levels; near-term the market will likely look at this on an EV/GP like other high growth FinTech payment co's (e.g., DLO, MQ,  LSPD, etc...) and you should be able to generate a ~20% IRR over that period of time.

M&A: 

The payments industry has been one of the most acquisitive sub-sectors in the market due to the economies of scale & inherent network effects. As a <$5B asset in the middle of numerous attractive end-markets, with its own two-sided network, PAYO would be an attractive acquisition target for countless legacy & more modern payment processors alike. 

Risks: 

The biggest risk in the business is that the Greater China area (China, Hong Kong, and Taiwan) represents ~36% of revenue. To the extent China continues to crack down on international commerce these SMB’s may be prohibited. 

Catalyst

The company recently completed the De-SPAC process on June 29th. We’ll see sell-side initiations and management roadshow inside the next ~30 days, which will occur at the same time as PIPE shares unlock, which will likely create another buying opportunity. 

It will take some time for a normalized shareholder base, but ‘21E should prove to be a strong year for the company given some of the re-opening tailwinds associated with their travel marketplaces (most notably ABNB), followed by continued strength in '22E-'23E due to these macro tailwinds.