KeyStone’s Your Stock Our Take: PayPal Holdings, Inc. (PYPL:NASDAQ), and STARS: Sangoma Technologies Corporation (STC:TSX-V) & Mustgrow Biologics Corp. (MGRO:CSE).
In Our Take Segment, we answer a listener question on global technology platform and digital payments leader PayPal Holdings, Inc. (PYPL:NASDAQ) which recently released its third quarter financial results highlighted by a solid 19% revenue increase.
Our first Star of the Week is no stranger to KeyStone clients having been in our Canadian Small-Cap research Focus Buy Portfolio for over 2-years is, Sangoma Technologies Corporation (STC:TSX-V), which delivers Unified Communications solutions for SMBs, Enterprises, OEMs, and Service Providers, both on-premise and in the cloud. The stock is up 25% in the last month, 78% year to date and 192% since we recommended it to clients just under two years ago at $0.72.
Our second Star of the Week is a development stage company, Mustgrow Biologics Corp. (MGRO:CSE), an agricultural biotech company developing and commercializing a portfolio of natural, science-based bio-pesticides. The stock was up 27.91% last week and up over 70% since its initial public offering on the Canadian Securities Exchange just five months ago. We endeavor to find out what is driving the stock and whether it is justified or pure speculation?
Your Stock, Our Take
PayPal Holdings (PYPL: NASDAQ)
Current Price: $104.07
Market Cap: $122.2 million
What does the company do?
PayPal Holdings, Inc. is a global digital payments and money transfer company. The company’s payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products. Paypal had 295 million active accounts at the end of Q3 2019.
Key Points:
PayPal’s share price was trending up for the first half of the year but has moved down moderately since July, in spite of strong performance in the overall stock market and tech sector specifically.
Recent Financial Results:
- Released Q3 2019 financials on October 23rd.
- Revenue increased 19% to $4.35 billion.
- Non-GAAP operating income of $1.03 billion, up 30%.
- Non-GAAP EPS of $0.76, up 31%.
- Cash flow from operations of $1.1 billion with free cash flow of $923 million.
- 8 million net new active accounts, bringing total active accounts to 295 million accounts, up 16%.
- 1 billion payment transactions, up 25%.
- 8 payment transactions per active account on a trailing twelve months basis, up 9%.
- 2019 non-GAAP EPS guidance of $3.06 to $3.08 (year-over-year growth of 27%).
Our Take:
PE: 34 times (based on 2019 guidance).
Paypal is a pioneer in the digital payment and money transfer space. The fundamentals of the company continue to look strong. They are highly profitable; the balance sheet is healthy and revenue and earnings have been increasing at a double-digit growth rate.
The question we have to ask ourselves is…. why has the stock underperformed the market since July?
I think one of the big factors impacting PayPal right now is competition. PayPal is far from the only player in this market. Other entrants have moved into the digital payment space to compete for market share, one of the most notable being Apple, with Apple Pay. PayPal still has more market share but Apple’s CEO Tim Cook claimed that Apply Pay doubled its transactions in fiscal Q4 to 3 billion transactions, or 4 times the growth of Paypal.
More than likely, the global online payment market will have space for more than one large player and there will continue to be growth opportunities for PayPal going forward. The valuation of 34 times 2019 non-GAAP earnings guidance isn’t cheap but is certainly not out of line for U.S. technology stocks. There may be value in PayPal at the current price as the current fundamentals do appear strong. Its not a recommendation of KeyStone but for investors looking to take a position, I would advise entering into the stock gradually as the recent downward trend could provide the opportunity to buy in at a lower price.
Weekly Star
Sangoma Technologies Corporation (STC:TSX-V)
Current Price: $2.10
Market Cap: $ 142.53 Million
Star Performance:
Industry: Telecommunications
Recommended: October 2018
Recommendation Price: $0.72
Star Performance:
The stock is up 25% in the last month, 78% year to date and 192% since we recommended it to clients just under two years ago at $0.72. record on the stock.
What does the company do?
Sangoma is a leading provider of software/hardware products and accompanying Cloud services that deliver Unified Communications capability or enhance IP communications systems, in both telecom and datacom applications. Enterprises, SMBs and carriers in more than 100 countries rely on Sangoma’s technology as part of their mission-critical infrastructures.
Sangoma has been a major player in the open source telephony (OST) business for many years. To protect its future, Sangoma recognized the critical need to evolve the business beyond its reliance on PSTN-based cards that often connected to open source installations.
This started with an operational rebuild, which included an internal build out of the product portfolio -including as gateways, SBCs, a core PBX, IP phones, and cloud services – broadening from SM to enterprise/Service Provider/OEM customer segments as well, and expanding geographically from a North American focused company to a global enterprise with customers/staff around the world.
As a result, Sangoma is now a stronger competitor in the larger, more typical communications market, which is not generally OST based.
What is driving the stock?
- Over the past 12-months, the company has completely two transformational acquisitions which have driven growth.
Q1 2020
- For the first quarter of fiscal 2020, sales were $28.01 million, 31% higher than the same quarter last year and a record for Sangoma’s first quarter.
- EBITDA at $3.67 million was 46% higher than in the same quarter last year.
- Net income for the first quarter ended September 30, 2019 was $0.91 million compared to net loss of $1.00 million in fiscal 2019
Conclusion:
Sangoma has performed well in 2019, both financially and the stock price. Given its recent acquisition, the company is poised to grow once again in 2020. We are just releasing our client update on the stock with our current BUY/SELL/HOLD rating based on the just announced Q1 2020 and our outlook moving forward.
The gains over the past month, year and nearly 200% jump since our original recommendation, make Sangoma our Star of the Week.
Weekly Star
Mustgrow Biologics Corp. (MGRO:CSE)
Current Price: $0.55
Market Cap: $13.752 Million
Star Performance:
The stock was up 27.91% last week and up over 70% since its initial public offering on the Canadian Securities Exchange just five months ago.
What does the company do?
MustGrow Biologics Corp is a Canada based company engaged in the development of natural biopesticide products from mustard seed. It is focused on the development and commercialization of non-synthetic AITC (Allyl Isothiocyanate) from mustard seed for use as a natural biofumigant for control of nematodes, soil-borne diseases, and other soil pests.
What is driving the stock?
Nothing of great significance appears to be driving the stock higher other than possible excitement for more farmers seeking a ‘natural biological’ alternative to chemistry-based pesticide products.
Investor enthusiasm for future demand of the company’s products may also be fueling the share price move as Mustgrow has recently announced multiple initiatives for the possible use of their biopesticides, which include:
- On November 12, 2019, Mustgrow stated they were to commence work on a disease that is threatening global banana supply. This new pathogen which has made Columbia declare a national state of emergency is called Fusarium wilt Tropical Race 4.
- On September 3, 2019, the company announced the exclusive rights of bio-fungicide product for cannabis and hemp cultivation which focus on powdery mildew suppression.
- On July 24th, 2019, the company announced a Bio-control R&D program for tobacco agriculture which they claim would target the global tobacco industry.
Financial Results
Q2, 2019
- The company has yet to produce any revenue over the past trailing twelve months.
- EBITDA was a loss of $325,000, in Q2, 2019, compared to a loss of $166,000 for the same quarter last year.
- Net Income was a loss of $337,000, in Q2, 2019, compared to a loss of $177,000 for the same quarter last year.
Conclusion:
Taking a look at the company’s balance sheet, they do have a net cash position of $385,000, but the company’s D/E ratio would indicate that they are highly levered with a ratio of 7.7x. But it should be understood here that since the company has been producing losses and accumulating a deficit on the balance sheet, equity is quite low.
So overall this appears to be a story of market speculation bidding the share price up as the company’s underlying fundamentals do not support such a move. The company is not generating any revenue and continues to lose money while it ramps up its research and development costs.
To top it off, on November 15th, 2019, the company announced a $1.5 million equity private placement at a price per unit of $0.35 per share which was a significant discount to the then current market price. The company stated that they intend to use the proceeds from the private placement to fund research and development, and for working capital and general corporate purposes. So, it appears that the company is just raising money to keep operations afloat.
There is definitely some enthusiasm for Mustgrow’s products as it is a natural alternative to chemical based pesticides and there are many possible uses for these natural alternatives ranging from the cannabis industry to general food production.
Although the share price has increased in recent months claiming our coveted status of Star of the Week, the move upward could be considered unwarranted based on the company’s underlying fundamentals. We will continue to monitor the stock going forward, but at this time it is far from meeting our investment criteria.
