MOGO - Mogo: Worth Keeping It On Your Watchlist But Not A Buy For Now

2023-07-20 08:40:09 ET

Summary

• Mogo's stock has dropped 75% in the last five years and is currently trading under a dollar, risking delisting from the Nasdaq exchange.
• The company has cut unprofitable services and is focusing on digital wealth, including MogoTrade and Moka, but needs to work on reducing operating expenses.
• Mogo's financials show a negative EBIT and operating cashflows, with the company financing interest expense through issuing more debt or shares, diluting shareholder value.
• It's not a good time to start a position because share dilution may continue and the company will not turn a profit for a while.

Investment Thesis

I wanted to take a look at Mogo's ( MOGO ) performance over the last few years and see what the company has been up to recently to see if it may be a worthy investment right now. I will look at the company’s outlook and its historical financials. I would say the company is starting to go in the right direction, however, I would hold off investing for now until I see the company improving its financial metrics considerably.

Outlook

It’s been a while since the company has been covered on SA. The stock is down 75% in the last 5 years, with a massive surge in the first quarter of ’21, which can only be explained by the meme-fueled fad and quickly dissipated. I’m guessing Robinhood ( HOOD ) wasn’t the only one that disabled the buy button on some stocks during that time. Now the stock is trading under a dollar, which is a little scary because it can be delisted from the Nasdaq exchange if it doesn't regain within 180 days, which I think has already passed.

So, what has changed in recent times that prompted me to look into the stock? The management is very excited about the future of the company which is supposed to be "lean and mean". In Q4 '22, the management announced it is trimming the fat. It is cutting all the services that have become commoditized and are unprofitable to regain margins and become adjusted- EBITDA positive, which it did at the end of Q4, however, it's not that impressive to me since the company is still using non-IFRS figures and I'm just not a fan of that.

The company is finished with MogoCrypto completely and only has its crypto investments, in a form of an investment in Coinsquare. The crypto world was on fire for most of '22 and a lot of major companies as we all know have disappeared and were hit with lawsuits, like FTX. Coinsquare is the only regulated crypto exchange in Canada, so the company feels much safer with their investment and guiding their customers towards joining after the MogoCrypto shutdown. MogoProtect and free credit scoring monitoring also got the axe while also closing down their French operations to focus on the Canadian market.

The company is looking to become "lean and mean" by mostly focusing on digital wealth, which includes MogoTrade and Moka. The company aims to have one app for these services. MogoTrade is I believe a very good service that I wish many countries around the world would have. It is similar to Robinhood, which offers no fees trading, although it does not have as many available products to trade, it is still very appealing because fees can eat up profits quickly. Further features can be added to the platform with time, just like Robinhood did, so I would expect it to grow further. I am not a fan of the invite-only model because I feel like it's not the best way to market your product, I'm not even sure it’s the cheaper way of marketing and I feel like it is limiting the growth potential.

The company needs to work on its operating expenses, and closing down the unprofitable business segments is definitely the right way to go, and I commend them for it. The biggest potential I see in the outlook is MogoTrade, and if the company manages to gain market share, it could become profitable eventually, the question is when?

Financials

Just to note, all the graphs below will be as of FY22, as I prefer to look at full-year results rather than quarterlies to get a better sense of where the company is heading. I will mention some numbers from the latest quarter if I think these are necessary for extra color. As of Q1 ’23 , the company had CA$24m in cash and equivalents, against CA$44m in credit facility which has a max interest rate of USD LIBOR +900bps. Since EBIT and operating cashflows have been negative for the longest time, the company will have to finance the interest expense through the issue of more debt or raise capital by issuing more shares and diluting current shareholders’ value. And the company has been doing just that for the last decade. Share count went from around 18m in FY14 to 76m by FY22, so it is safe to say that the long-term shareholders have not only lost from stock price depreciation but by share dilution as well. I don’t see how this is going to stop now, since the company is still not making money, I can see it diluting for a while and that is a big red flag for me.

The company’s current ratio has been decent over the last few years, which is one positive so far. The ratio stood at around 1.5 as of FY22, which means that if it had to pay all its short-term obligations on the same day, it should be able to.

In terms of efficiency and profitability, it's not looking good since the company is not able to turn a profit. ROA and ROE are well above my minimums of 5% for ROA and 10% for ROE. This tells me that the management in the past was not utilizing the company’s assets efficiently and was not creating any value for shareholders and it’s the same story in Q1 ’23 so far.

The company also has no competitive advantage or a strong moat so far, which makes sense, however, I would like to see these metrics improve over time with the cost-cutting measures in place and some further ones to be announced in the future. I'd like to see an ROIC of at least 10%.

In terms of margins, it is looking no better here either, with massive losses recorded in FY22. It was a tough year for sure, and going forward I would expect margins to improve with the aforementioned cost-cutting initiatives.

Overall, there is very little to like in these financials so far. I don’t see any turnaround yet and I would need to see what the management is going to do for the rest of the year before revisiting the company as right now it looks like a bad company to invest in fundamentally.

Closing Comments

I can't even come up with a reasonable price target for the company because I don't know when it will turn a profit and if it can turn a profit in the future. Right now, what I will say is this, if you have been a long-term holder of the stock even after it lost most of its value, I don't see the reason for you to sell for such a massive loss, the stock price can only go to zero which isn't that far anymore. I'd hold on to those shares for a long time to see if the company will be able to turn the ship around because I do believe the leaner and meaner company is there somewhere and the execution of getting there looks promising.

I won't be opening a position any time soon, but I will follow how the (hopefully) turnaround story develops in the upcoming months and even years. I'll check back on it from time to time, but I don't expect a massive shift very quickly.

I can see the company continue diluting shares in the near term and that is not ideal for now, so I'll wait patiently for now.

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