| Leading Canadian financial technology company so much more than play on crypto. In recent weeks, shares of MOGO have traded much more consistently with crypto-currencies than with leading financial technology companies. We believe this reflects some investor misunderstanding of the business following recent investments in crypto businesses including Canadian crypto exchange Coinsquare and Canadian crypto custodian Tetra Trust Company. While these minority investments provide upside should the value of its investment increase with the rising popularity of crypto-currencies, company operations are still almost entirely driven by more traditional digital bank services. This includes fees from debit card use, payment processing, lending, and referral income. Today, we believe direct crypto exposure to operating results is less than 5.0% of total revenue, suggesting very little, if any, impact from the recent decline in value of many popular crypto-currencies, including Bitcoin. We believe the dislocation between operating results and share price will become more apparent when the company reports 2Q21 results in mid-August and recommend investors get involved ahead of more positive results.
MOGO shares trading inline with Bitcoin rather than high quality fintech. Over the past month, shares of MOGO have declined 21.1%, which compares to a 16.4% decline in Bitcoin, and a 3.0% decline in the Russell 2000. Over this same period, U.S. financial technology companies such as Square, Inc. and Paypal Holdings, Inc. have appreciated by 4.6%, and 5.2%, respectively. With approximately 5.0%, or possibly less, of MOGO's revenue tied to crypto trading, we believe there is a meaningful dislocation between operating results and trading in MOGO shares. As a result, shares of MOGO now trade at a meaningful discount to U.S. financial technology peers, despite having both largely similar operations and a similarly dominant market position, albeit in the smaller Canadian market. Shares of MOGO currently trade at an EV/revenue multiple of approximately 7.1x 2022 consensus estimates, which compare to the fintech peer group at closer to 18.0x. As the company continues to demonstrate its ability to grow revenue, irrespective of the trading direction of major crypto-currencies, we believe MOGO shares should see its valuation move towards peer levels.
Valuation. Our $16 price target on shares of MOGO represents approximately 180% upside from recent trading levels. Our price target reflects $11 per share of value for the existing Mogo business, which we value at 10x our 2022 revenue estimate of C$70.5M, a meaningful discount to our fintech peer group which trades at an average multiple of closer to 18x 2022 revenue. The discount reflects the smaller size of both the company and the smaller Canadian market in which it operates. We value the company's total potential investment in crypto exchange platform Coinsquare at approximately $5 per MOGO share based on a 25% discount to the 2021 EV/revenue multiple for larger crypto exchange Coinbase Global, Inc. (COIN; not rated). This suggests MOGO shares do not currently reflect the intrinisc value of the core operations let alone any value for the potential 48% investment in Coinsquare. Longer term, we believe the company is positioned to deliver improving financial performance, which, in our view, would warrant multiple expansion. |