The financial technology space, often clubbed together as "fintech," is often considered one of the hottest sectors in the world, not just within the listed space but also among private equity and venture capital players.
As fintech companies have made new in-roads, their offerings to merchants have increased from simple payment gateway systems to a plethora of data analytics offerings. The dependence of businesses on fintech applications is increasing by the day and the valuations of these companies are skyrocketing.
It is rare to find a stock within this industry that isn't trading at a double-digit price-sales ratio, which is why the OLB Group (OLB, Financial) can be termed as a hidden gem. The financial ecosystem provider for the merchant community is running a profitable enterprise and is well-equipped to grow at a good pace after its recent round of fundraising.
Company overview
The OLB Group runs a payment ecosystem for the merchant community which includes electronic payment processing, cloud-based multi-channel commerce platform solutions and crowdfunding services. The New York-based company offers a wide array of products and acts as a payment facilitator and commerce service provider that delivers fully-outsourced, private label shopping solutions to highly trafficked websites and retail locations.
Its operations take place through three subsidiaries – eVance, Omnisoft.io and CrowdPay.us. Each of these products caters to the specific needs of merchants: eVance is a payment processing solution, whereas CrowdPay is a white label capital-raising platform. The OLB Group also runs a cloud-based omnichannel platform known as ShopFast which helps end consumers access and purchase various products and services offered by its merchant clientele. This offering is complementary to its e-commerce development and consulting services.
Wide suite of offerings under a SaaS model
Software-as-a-service (SaaS) has been a widely successful model, not just in fintech but across the software space. OLB also follows this model where it earns a fixed fee each month from its merchants for providing a wide suite of applications. Its offerings start off with SecurePay, its payment gateway, and a virtual terminal with proprietary business management tools. The company is not just processing payments for merchants but also processing the data and providing a wide variety of analytics to them such as details of customer-wise payments, effects of seasonality and many more.
There are a number of turnkey business solutions that it provides merchants in order to help them create operational efficiency through its OmniSoft business management platform. With the pandemic hitting the merchant community hard, OLB has helped many merchants sell their products online through OLB's e-commerce solutions under ShopFast. This has been a particularly relevant product of the company as it has helped merchants synchronize their online catalog of products with the ones available in their stores and promote their online sales through various social media platforms.
All these offerings have been provided to merchants through a fixed monthly subscription fee, ensuring strong revenue visibility for OLB as a company. Its offerings also include various plugins, such as the Quickbooks plugin, which helps merchants maintain books of accounts on Quickbooks simultaneously along with accepting payments. Thus, the company provides a holistic package of solutions creating a finance ecosystem in itself for the traditional merchant community.
Growth strategy post the fundraise
The biggest task at hand for a company like OLB, which has a ready technological infrastructure, is growth through merchant onboarding. Management has a strategy of buying out portfolios of many small-sized merchants in order to expand their current base of over 8,500 merchants. In its fundraising prospectus, OLB indicates that its platforms witnessed close to 23.5 million transactions each year with a gross transaction volume of around $965 million.
The management has been looking to grow its base of merchants and potentially acquire companies or technologies that are synergistic with its current business, which is why it went ahead with a public offering in August 2020. The OLB Group closed its offering of 700,000 units consisting of one share of common stock at $9, two Series A warrants with a $9.00 exercise price and one half of one Series B warrant with a $4.50 exercise price. It raised gross proceeds of approximately $6.45 million from the offering, which it now intends to use for growing its merchant base and adding new technologies.
It is worth highlighting that management's strategy of acquiring many small fragmented merchants implies a minimal concentration risk. Since no single merchant generates a significant portion of the company's revenues, loss of revenue due to merchants switching service providers is minimal. Also, the basic stickiness of its holistic fintech solution is very high and so the dropout rate of merchants is minimal. Moreover, merchants are continuously diversified across different sectors which have helped the company survive the tough pandemic business environment. In the lockdown, OLB's restaurant clients did not perform well but this was made up by a strong performance of its retail clients, thus ensuring a built-in hedge for risk to the top-line.
Why is OLB so undervalued?
From OLB's offerings, it is evident that the company competes with listed giants like Shopify (SHOP, Financial) and Square (SQ, Financial). The company's entire payment ecosystem model is similar to Square, but its valuation is significantly lower. Square trades at a price-sales of around 14.07 whereas OLB's is hardly 2.05. The same applies to Shopify. The OLB Group's e-commerce solutions are within the same space as Shopify, which trades at a phenomenally high price-sales ratio of 58.01.
While OLB is much smaller in terms of scale than either of these companies, putting it at a competitive disadvantage, it has a positive Ebitda margin of nearly 10% as per its most recent filings, which is much higher than the margins of Square and Shopify. It caters to an equally large market pie as these two giants.
The recent capital raise coupled with their strategy of acquiring merchant portfolios is bound to propel its growth, in my view. The lack of visibility and limited investor communication from the management is perhaps the biggest reason for the stock to have such low multiples. However, I think this will be a temporary phase. A growing merchant portfolio is expected to rapidly accelerate OLB's revenues resulting in a string of solid results that could push the stock back to double-digits in the near future. Hence, this company looks like a very compelling investment proposition at current levels.
Disclosure: No positions.
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