Today we have a very speculative idea: take shares of fintech Q2 Holdings (NYSE: QTWO), to capitalize on their rebound after a recent big drop.
Growth potential and validity: 20% behind 16 Months; 66,5% behind 5 years; 132% behind 10 years.
Why stocks can go up: they fell hard, and the company can be bought.
How do we act: take now 62,44 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
This is a fintech enterprise, providing a platform for digital banking to financial institutions: banks, credit unions and others like them. What does it look like, can be viewed on the YouTube channel.
But if it's very simple: Q2 provides online banking solution for those financial institutions, who are sorry to spend money on creating their own application from scratch. The company's report is full of technical details and descriptions of the features of its platform..
By segment, revenue is divided as follows:
- Subscription - 71,25%. Customer access to the company's software under a service contract for a certain period.
- Transactions — 13,8%. Company commission from end-user payments on its platform, as well as interbank fees from credit cards of the company's partners.
- Services and more — 14,95%. That, what the company earns by setting up and optimizing its software, as well as consulting services.
The company makes almost all of its money in the US., and the share of foreign markets for it is so insignificant, that it is not named in the report.
The company is unprofitable.
Arguments in favor of the company
Fell down. Since February 2021, the company's shares have fallen heavily under the weight of their exorbitant high prices from 146 to 62,44 $. Now Q2 is even cheaper, than in February 2020, at the start of the pandemic. But the company's revenue has since grown by almost one and a half times., so i think, that investors might note her progress. So there is reason to believe, that stocks can rebound.
Type perspective. According to the Q2 revenue growth rate, you can see, that the company's services are in great demand. Nothing surprising, because cash and checks (sic!) still make up a significant share in the structure of payments. A huge portion of the US population is not yet as active in using apps.
At the same time, the activity of banking organizations is gradually shifting online., and the number of physical branches is reduced. So soon all financial institutions, who do not yet have their own platforms or applications for communication with customers, risk losing to those competitors, who are doing well on this front. That's why I think, that the demand for Q2 services will grow. Well, the aura of “promising fintech” will help Q2 quotes.
Absolute cheapness. Capitalization of Q2 is about 3.55 billion dollars. This will make it a little bit easier for a crowd of retail investors to pump the company's shares.. Yes, and institutional investors can also participate in this story., since the cost of fintech startups has now fallen sharply - for sure, banks and funds will want to capitalize on the rebound.
Can buy. The company's revenue retention rate is 122% - means, She squeezes so much out of her remaining clients, that this more than compensates for the damage from the departure of some customers. The company's platform serves 19.2 million individual users based on 420 organizations connected to Q2. It's not so crazy a lot - but still a lot.
Considering all this, relatively low cost of Q2 and, finally, Fintech arms race among the largest US banks, i would expect, that Q2 will soon receive an offer to purchase.
What can get in the way
Expensive. According to company estimates, its target market is approximately $10 billion. It's not the biggest market in the world, and at the same time the company stands as 35% their market, taking less 5%. P / S she has about 7,3 - it's not too much, but not too little. All in all, stocks may well fall even lower before, how to buy a company. If they buy at all.
This is not the business, what are you looking for. Considering the above problem, the company may not be bought at all. And I doubt the prospects of its independent existence. She's heavily indebted: 797,918 million dollars, out of which, Really, during the year, only 163.938 million. Although the money at her disposal is still enough, with this level of loss, like now, it is better for her and her shareholders to find a buyer for this business as soon as possible.
convert it. A significant portion of the company's $544.7 million debt is in convertible bonds., which can be converted into shares. If the holders of this company's debt decide to turn it into shares, then this will cause a strong dilution of existing Q2 shares and a drop in quotes.
My volatility, we are stable. The company's stock will by definition be volatile simply because of its unprofitability.. And the company's large debt will scare off investors. And the threat of bankruptcy is always nearby.
What's the bottom line?
Shares can be taken now by 62,44 $. Then there are three options:
- conservative. Wait for the stock to rise until 75 $. Given the company's progress over these 2 of the year, we can hope so, that they will buy it with a premium in 20% to the current price. well, or if it doesn't, then in the extreme case, investors will reward it for revenue growth. Because the current price of Q2 does not reflect its achievements in the past 2 of the year. It's better to focus on the deadline here 16 Months;
- impudent. Wait for growth until 104 $. This is an option for those, who believe in business Q2, - here it is better to focus on 5 years;
- prohibitively arrogant. Wait for stock to rise 145 $. It's better to be prepared to wait. 10 years.
Well, keep in mind, that idea is very speculative. If you are not ready for that, that these stocks will shake, then stay away from them.
