Description

Summary Investment Thesis

Payoneer Global, Inc. (ticker: PAYO) is a fintech that specializes in cross-border payments for small-and-medium sized businesses (“SMBs”). The company enables the cross-border pay-out of funds from marketplaces to their SMB partners (e.g. sellers, hosts, freelancers) via a Payoneer account that acts as a financial platform for the SMB to collect and transfer funds, invoice customers, and pay bills. Our thesis on PAYO is as follows:

1. The company operates a niche business, but it is the leading player in its niche and nearly all the big marketplaces use Payoneer in some form. Its brand is well known and trusted in emerging markets where most of its SMB users are based. We believe this established trust coupled with its global infrastructure is difficult to replicate.

2. The company should benefit from multiple drivers of growth for the foreseeable future including rising e-commerce penetration, marketplace expansion, and growth in cross-border transactions. The company has been growing +30% top-line over the last few years and has established +20% revenue growth as its long-term target.

3. The company has strong underlying unit economics (e.g. <12 month customer acquisition payback) and is a sticky solution (e.g. >100% net revenue retention). It is sticky both for the marketplace and the SMB. It is sticky for the marketplaces because all the KYC information of its SMB partners is collected and maintained by PAYO on behalf of the marketplace. This is particularly important considering the heightened scrutiny around international payments to small accounts. It is sticky for the SMBs because they use their accounts effectively as a business bank-account with established flows into and out of their Payoneer wallets. The company requires limited capital to grow and we believe will demonstrate significant contribution margins and conversion to free cash flow in the years ahead.

4. The stock is very cheap - 7-8x EBITDA - where EBITDA can grow +20% over-time with limited capex. This valuation is totally divorced from other high grow payment names. We believe the stock can double over the next year.

Why does the opportunity exist?

We believe the company is misunderstood by the public markets for a few reasons. First, because it came public via SPAC during the pandemic and it never really found its footing in the public markets despite being a high quality business and one of the few SPAC-IPOs to outperform its initial projections. Second, because it’s a complicated company with no pure comps. Third, because Payoneer was historically undermanaged and prioritized pnl investments over profitability. Changes are afoot on this last point with new management that was installed last year that have since announced cost cuts, re-orientated investment priorities, and announced a return of capital through share repurchases.

Another dynamic at play here is interest rates. The company makes money from transaction volumes on its platform, but it also generates interest income on the customer funds stored in Payoneer wallets. Given the rise in interest rates, the company significantly grew this interest income in 2023 over 2022, but it then used a portion of this increased cashflow to re-invest into a few key initiatives. As the prior team never really prioritized profitability, this reinforced a view that the company can’t make much money outside of the float income. The business came to be perceived by investors narrowly as a “play on rates” - we believe this false impression will naturally correct with volume growth in the years ahead. 

Background

The company was founded in 2005 and went public via SPAC combination in 2021. While we believe PAYO has actually been under-managed, it was still one of the few “SPAC IPOs” that has executed well and exceeded the projections originally provided at the time of the combination. We believe it represents an attractive investment that has been overlooked by the public markets. The company is based in New York City with its IT mainly in Israel (~50% of employees). It operates in 190 countries processing ~$65bn of transaction volume (LTM 3Q2023).

What does the company do?

Payoneer enables the pay-out of funds by marketplaces to SMB partners operating in overseas markets. Key categories include online sellers, freelancers, vacation rental hosts, and digital marketers. See below an exhibit from the September 2023 investor day which illustrates the spectrum of these relationships. 

Exhibit 1: Spectrum of relationships

The company enables the payment from the marketplace to the SMB and provides value to both sides of the transaction. To the marketplace, Payoneer enables payments globally at scale and resolves for them all the regulatory and AML/KYC requirements particular to each market. In most cases Payoneer is one of several ways for the marketplace participant to get paid, but in certain country corridors / platforms it is effectively the exclusive provider. 

On the SMB side, Payoneer provides an e-wallet to get paid in their preferred currency (e.g. if you are based in an emerging market you can use Payoneer to get paid in dollars without setting up a US bank account). There is also functionality wrapped around this core payout functional, such as debit card, accounts receivable / invoicing, and B2B payments that encourage the customer to keep the funds inside their Payoneer account and drive take-rate. See below exhibit which layouts out the core functionality of a Payoneer account to the SMB. 

Exhibit 2: SMB Functionality

How does the company make money? 

There are essentially two ways the company makes money. Take-rate on transaction volume and interest income on customer funds. If you exclude the interest income, the core take-rate is around ~90bps of transaction volume and has drifted upwards over the last few years. Some of this take-rate comes from the marketplace side to facilitate payments but most of it comes from the SMB side through interchange when the SMB ultimately uses funds to buy goods on a debit card, convert it to local currency, or make transfers to a bank. The main focus of the product development roadmap is to expand the suite of functionality to the SMB to drive customer stickiness, facilitate more customer transaction volume, and increase take-rate. Ideally the SMB receives funds from sources beyond the Payoneer-linked marketplace and come to use their Payoneer account effectively as a business bank account to receive/make payments. See below an exhibit that illustrates the product roadmap. 

Exhibit 3: Product Development Roadmap

On the float side, the company holds ~$5.4bn of customer funds. It earns interest income from these funds which are reported in its revenues. Most of these funds are held in shorter term treasuries but there is always some money that is non-interest bearing because it is in transit to facilitate transactions. We estimate that PAYO can earn short-term interest rates on ~80% of its customer funds – these are akin to zero cost deposits at a bank. In the future we anticipate that the customer funds will grow at or above the growth rate of volume on the platform.

Management

Several key management team members have been upgraded since the company came public including the CEO, John Caplan, and the CFO, Beatrice Ordonez. Caplan initially joined in 2022 as co-CEO, alongside long-time CEO Scott Galit. Caplan then assumed the role of sole CEO in 2023 (Gailit retained his seat on the BoD). Previously Caplan was President of North America and Europe at Allibaba.com, the cross-border B2B business unit of the Alibaba Group. He joined Alibaba’s team in 2017 following its acquisition of OpenSky, an SMB software company that he founded in 2009, which empowered ecommerce SMBs to optimize their distribution across marketplaces. Ordonez joined in early 2023, having previously served in CFO positions at Sterling National Bank and OTC Markets Group. We view both these hires as strong upgrades.

Growth Algorithm

Over the last few years it has grown revenue +30% and has set long-term objectives to grow revenue +20%. The Company is operating in huge markets that are growing rapidly (e.g. e-commerce marketplaces, freelancers), which makes its long-term objective seem reasonable. Bottoms-up, the company services over ~2m active SMB customers but ~75% of the revenue comes from ~500k customers, which the company refers to as “ICPs” (Ideal Customer Profiles); ~50k of these ICPs transact +$10k volume/month and delivery ~50% of revenue. It is building out its products and tailoring the onboarding process to maximize the growth of these higher volume customers. It is growing ICPs with +$10k/month of volume high-teens while also expanding take-rate. We believe these initiatives will allow the company to accelerate its growth over the next several years.

Exhibit 4: Stratification of Customers

Historically the company has done a bad job delivering bottom line. We believe this is in part a carryover of the prior management (and culture) from when the company was private and funded with venture capital. Since the new management ascended last year, there has been a marked shift in focus to profitability and the new team has initiated several rounds of cost initiatives to develop a leaner more focused model. Most of the costs of the business are fixed in nature and we believe there can be very strong contribution margins alongside future growth. It has set LT objectives to achieve +25% EBITDA margins which we believe is very achievable considering this cost structure and gearing to payment volumes.

Exhibit 5: Cost structure Illustration

Valuation

Payoneer is currently valued at ~7x EBITDA based on consensus estimates. We think it’s appropriate to adjust the interest income to a lower normalized interest rate. We use ~4% (the current 5Y SOFR swap) and pencil out a current valuation of ~8x EBITDA. Either way, it seems too cheap for a business that can grow EBITDA +20% over time. There are no perfect comps for the business but DLO/SQ/BILL all trade +20x EBITDA. Believe that PAYO can double over the next year with a modest re-rate and earnings growth. The company has nearly ~$600m of cash on its balance sheet and recently approved a $250m share repurchase. The company could get much more aggressive with repurchasing shares if the market ignores progress. If it does not, we believe it could create an attractive activist situation to force the hand of management to more aggressively buyback stock or initiate a sale of the business. 

Key Risks

1. Murkey Competitive Landscape. There are many businesses that overlap with Payoneer. Some focus on specific corridors (e.g. Ant focused on China) while others focus across geographies and segments of which marketplaces are one (e.g. Hyperwallet/Paypal, World Pay). Ultimately, we believe Payoneer is differentiated in its scope with a large addressable market but it is complicated to analyze.

2. Emerging Markets. The company deals with SMBs located in emerging markets and its largest exposure is China which constitute ~1/3rd of revenue. This inherently presents risks around shifting regulations and global macro.

3. KYC/AML. The company is responsible for KYC and AML checks on relatively small payments and customers leaving room to make mistakes. There is a risk this could draw regulatory scrutiny or bad publicity. In the past it has had to pay fines and has drawn unwelcomed publicity for certain violations.

4. Blowing the Cash. The Company has nearly ~$600m of corporate cash on its balance sheet. New management seems disciplined, but there is some risk they blow some of this cash on a dumb acquisition.

    

Catalyst

Catalysts

1. Business plan execution will accelerate revenue growth and non-float cash flow that we believe will lead to a re-rate of the stock.

2. Favorable capital allocation / share repurchases.

3. Potential activist target. Potential sale of the company.