CMPO - CompoSecure: Leading Metal Card Provider Set To Benefit From A Growing Market

Summary

• The metal payment card market is expected to triple by 2025, growing from a little under 30 million cards issued in 2021, to just over 90 million cards in 2025.
• Arculus, its promising but commercially unproven crypto cold storage wallet solution, offers a call option on wider adoption and improved crypto sentiment.
• I keep a Dec 2023 price target of $11 on the stock with an assumed 2024 EV/EBITDA multiple of 7x.

Thesis

CompoSecure, Inc. ( CMPO ) is the leading provider of premium metal payment cards, a market expected to double to roughly 100 million cards issued by 2024 (driven by the rising popularity of mass affluent reward card programs). CMPO, the undisputed market leader in the space, has worldwide marketing collaborations with leading card issuers, an array of patents, and new card features on the come, and it is poised to capture a large share of the market. In addition, CMPO recently introduced Arculus, a consumer crypto cold storage wallet product, which may become a significant revenue source over time. I keep a Dec 2023 price target of $11 on the stock with an assumed 2024 EV/EBITDA multiple of 7x.

Company Description

CompoSecure is the leading provider of premium metal payment cards with a leading market share. Since 2010, CMPO has produced and sold more than 114 million metal payment cards worldwide, including more than 22 million in 2021 alone. In addition, the company provides security and authentication services to financial institutions, crypto exchanges, and consumers. CMPO recently launched a cold storage wallet, Arculus that enables users to securely store and trade cryptocurrency and non-fungible tokens, which is directionally leveraged to cryptocurrency adoption and could become a meaningful growth driver over time. CMPO went public through a SPAC merger with Roman DBDR on December 27, 2021, and began trading on the Nasdaq on December 28, 2021.

Why am I bullish on CompoSecure?

Leading Metal Card Provider with Growing Client Roster and Product Suite

CMPO introduced the first metal payment card in 2003 (American Express Centurion) and doubled its client roster to 100 issuers in 2021 . Since 2010, CMPO has produced and sold more than 114 million metal payment cards worldwide, including more than 22 million in 2021 alone. The company recently launched the Arculus Wallet , enables users to securely store and trade cryptocurrency and non-fungible tokens, which is a wildcard, in my view, could become a meaningful revenue contributor over time.

Metal cards are a critical marketing/retention tool and are an effective and inexpensive way for issuers to make a lasting impression on mass affluent consumers. AMEX saw a 52% increase in new accounts and upgrades when it launched its metal Platinum card in 2017. Other issuers soon took notice and followed suit. ABI Research expects metal cards issued to triple to 90 million by 2025, which could represent a $800 million annualized revenue opportunity by 2025. CMPO, the undisputed market leader, has worldwide marketing collaborations, an array of patents, and new card features on the come, and is poised to capture a large share of the market.

Deleveraging Play with Several Ways to Win

CMPO offers investors several ways to win. The company is a little over 3x levered today, but its cash cow metal cards business offers quasi-recurring, high-margin, mid-teens growth that underpins a de-leveraging story that could conservatively unlock 20-30% in equity value alone over the next 12 to 18 months. Arculus, its promising but commercially unproven crypto cold storage wallet solution, offers a call option on wider adoption and improved crypto sentiment.

Arculus Wallet Opportunity

Arculus Wallet is compatible with more than 45 different coins, which cover roughly 80% of the total cryptocurrency market cap. The Arculus Wallet launched in 3Q21 and is available on the Arculus website and Amazon and Walmart for $99. The Arculus Key Card interacts with smart-devices via NFC technology and biometric authentication, offering a more secure and convenient user experience. Arculus users can access their wallet, transact crypto, or view their NFTs by simply tapping their Key Card to their smartphone, whereas competing USB solutions must be plugged into a computer and require a passcode or seed-phrase. CMPO intends to expand the Arculus Platform into a comprehensive hardware, infrastructure, and services ecosystem, serving the needs of the cryptocurrency and eGaming industries, an $180 billion industry in its own right.

Valuation

CMPO shares are down by 37% in the past one year versus a 20% decline in the S&P 500, despite reporting revenue and profit upside to prior Street estimates in each of its last three quarters and raising its full-year outlook. My sense is that CMPO has gotten caught in the downdraft plaguing other SPAC offerings.

As the only publicly traded pure-play metal payment card manufacturer and with a promising, but still unproven, crypto cold storage wallet on the come, CMPO is a unique asset. The business is characterized by a high-margin, quasi-recurring revenue metal cards business, which benefits from the rising popularity of metal payment cards, and with a call option on broader adoption of its commercially unproven cold storage crypto wallet. I am intrigued by the cold storage opportunity but assigning little value to it at this point, given the uncertainty at this stage.

CMPO shares trade 7.8x on a forward EV/EBITDA basis versus 12.15x sector median. My sense is CMPO should trade no lower than the payment hardware manufacturing group and, with solid execution, could ultimately approach and exceed the merchant acquirer group average, given its faster growth profile. I view the longer-term Arculus Wallet opportunity as a cherry on top. I keep a December 2023 price target of $11 on CMPO, which applies a 7x target EBITDA multiple to my 2024 EBITDA estimate.

Risks

High Customer Concentration

American Express and JPMorgan Chase, CMPO's two largest clients, contributed for 72% of sales in 2021. A loss or material reduction in demand from either partner would adversely impact financial and stock performance.

Delays in Market Adoption of Cold Storage Wallet Solutions

Though cold storage wallets are more secure than hot wallets, awareness and adoption remain low. Moreover, according to TheBlock.co, fewer than 7 million blockchain addresses hold more than $1K in bitcoin or Ethereum assets, which is seen as a minimum threshold to consider purchasing a dedicated cold storage wallet. Slow adoption of cold storage wallet solutions or ineffective marketing spend could negatively impact CMPO financial and stock performance.

Final Thoughts

The metal payment card market, a subset of the broader card market, is nascent but growing rapidly as metal cards are increasingly being marketed to mass affluent customer segments. CMPO is the leading metal card producer globally and manufactured ~22 million (or roughly 75% of all metal cards produced) in 2021 and more than 110 million since 2003. The metal payment card market is expected to triple by 2025, growing from a little under 30 million cards issued in 2021, to just over 90 million cards in 2025, which could be a $800 million annualized revenue opportunity by 2025. I keep a December 2023 price target of $11 on CMPO, which applies a 7x target EBITDA multiple to my 2024 EBITDA estimate.

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