Written by Puja Tayal at The Motley Fool Canada
Last month, Canada’s payments processor Nuvei’s (TSX:NVEI) stock fell 45% after its second-quarter earnings. It reported weak earnings, a lower 2023 outlook, and a weaker medium-term revenue growth target. For a small tech company like Nuvei, which is operating in an already crowded payments platform market, a downward revision in its revenue target hints that growth is slowing. And with liquidity drying up in the economy because of high interest rates, investors are becoming more risk averse.
Is Nuvei stock’s 45% dip justified?
Here’s something you should understand about Nuvei. It is a payment technology facilitator for commerce, businesses, and governments. Its growth is influenced by economic growth and consumer demand. The Bank of Canada’s aggressive interest rate hike has weakened Canada’s consumption growth. Economists have been touting a recession in the latter half of the year. Thus, the weak revenue guidance is an industry-specific situation.
While Nuvei’s stock fell 45% since August, PayPal Holdings stock fell 17%. PayPal saw analyst ratings downgrades due to growing competition from Square and Apple.
Amid economic weakness and rising competition, Nuvei reduced its 2023 revenue guidance to $195 million from the previous $199 million at the midpoint. The revision in guidance came as Nuvei lost one of its large customers, and the acquisition of new business has been slow.
Should you buy Nuvei stock at the dip?
I have been bullish on this stock as the Paya acquisition opened a new stream of integrated payment channels with enterprises and governments. This segment will provide stable cash flows. However, its core growth will mainly come from global commerce, where it provides digital businesses with a payment platform. But a looming recession could weaken global commerce, and Nuvei could feel the impact of the spillovers.
While Nuvei has the technology to ride the e-commerce wave in the long term, the coming 6 to 12 months are a wait-and-watch period. Tech companies have low debt and high cash reserves, as the software business is not capital-intensive. But Nuvei is sitting on US$1.2 billion long-term debt against a cash reserve of US$118 million. The company intends to reduce its debt quickly.
Nuvei is showing signs of weakness, which many Canadian companies like Algonquin Power & Utilities and TransAlta Renewables showed before a major restructuring.
Nuvei reduced its guidance and medium-term target.
It assumed a huge debt load and high-interest bill (US$42.8 million).
It has sufficient cash to meet short-term liabilities. But if high interest rates continue for a longer period, it could hurt its profits.
Until Nuvei reduces its debt, I would adopt a wait-and-watch approach.
An alternative investment
Nuvei is a high-growth stock and comes with high risk. If you already own the stock, continue holding it for the long term. It could either recover from a possible recession and ride the secular trend of global commerce or get acquired by a bigger player. If the second option materializes, you can sell the stock to the buyer. But if the first option materializes, your investment could grow multifold in the long term. Moreover, Nuvei stock has a surprise growth angle if the crypto boom re-appears.
To complement a high-risk growth stock like Nuvei, consider investing in a resilient growth stock like Descartes Systems (TSX:DSG). Descartes is among the top providers of supply chain management solutions. Like Nuvei, Descartes will also benefit from growth in global commerce by providing services such as routing, logistics, transportation management, e-commerce shipping, and fulfilment.
Descartes’ revenue and profits have been growing steadily even in a weak economy because of its diverse customer base from airlines to retail to manufacturing and distribution. Moreover, the company’s stock price has shown a long-term growth trend. DSG stock rebounds from every dip (pandemic, US-China trade war, 2014 oil crisis, and 2008 Financial Crisis).
Having a mix of contrarian stocks in your portfolio can reduce your downside and boost your upside potential.
The post What to Make Out of Nuvei Stock’s 45% Dip in August 2023 appeared first on The Motley Fool Canada.
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The Motley Fool has positions in and recommends Nuvei. The Motley Fool recommends Apple, Block, and PayPal. Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.