2023-04-03 14:38:22 ET
Summary
- Prosus N.V. is a holding company that serves the world's Internet consumer group.
- Its investment in e-commerce is very promising and, in my view, anchors this company's long-term prosperity.
- Although its fundamentals are very promising, investors should be wary of the FX risk since it could harm the company's performance.
Investment Thesis
Prosus N.V. ( PROSY ) is a holding business for the global Internet consumer group. I believe the company's long-term success will be driven by its substantial investment in e-commerce to provide a selection of appealing products. I am sure that PROSY will be able to profit from the expected growth of the global internet service market, which is projected to grow at a CAGR of 3.8% to $470.49 billion in 2027.
Although the company has been making losses, something which is consistent in the industry it operates, the management is embarking on an elaborate plan to cut costs in a bid to turn the business profitable. I believe these efficiency initiatives, alongside the growing revenues, especially from e-commerce, will be instrumental in the company's profitability objective. I believe the already rising share prices, which gained more than 40%, are driven by the promising result of its diverse revenue streams in e-commerce.
Besides its product diversity, the company has also diversified geographically, which has its own benefits. I am bullish on this stock with the optimism its diversification brings and the strong balance sheet that helps hedge them against the current macroeconomic climate.
Company Overview: Diversity Manifesting
Prosus N.V. is a holding company that serves the world's Internet consumer group. The company is highly diversified both product-wise and geographically. The following is a breakdown of net sales by activity:
- Management of social networks and digital content (72.4%).
- Internet media (27.6%): primarily classified ads (OLX, Avito, etgo, etc.), mobile and electronic payment (PayU), e-commerce (eMAG), online food buying and delivery (Delivery Hero, Swiggy, iFood), and online education (Stack Overflow, Skillsoft, GoodHabitz) platforms.
- The percentage of net revenue generated in each region is as follows: Europe (52.7%), Latin America (26.7%), Asia (10.2%), North America (9.4%), and other regions (1%).
Market Screener
The aforementioned metrics indicate the company's diversity, which I think contributes to its competitive advantage by serving as a hedge against the potential failure of a single product line or market.
The Market Opportunity
PROSY is gearing up to take advantage of the e-commerce boom, so I believe it is essential to conduct thorough market research to assess its prospects. The firm prioritizes online retail and has pledged significant resources to expand.
During the projected years of 2022–2027, the global e-commerce market is anticipated to expand at a CAGR of 15.2%. As the number of people with access to the internet grows, so does the number of people using smartphones worldwide. E-commerce opportunities, including digital content, banking services, travel and leisure, and e-tailing, are becoming increasingly attractive to an expanding customer base as the prevalence of internet access grows. As a consequence, it is expected that customers' technical knowledge will have a positive effect on the market expansion.
Due to the continuous COVID-19 effects, customers increasingly choose online shopping as stores close. The outbreak has severely damaged critical economies like the US, China, India, and Italy. As a result, the market is anticipated to be considerably impacted by Europe and North America.
Increased internet and smartphone use are a boon to the e-commerce industry's expansion. Consumers' preferences shift towards online purchases as the internet and mobile phones become more commonplace. We Are Social's Digital 2020 report stated that there were 4.54 billion internet users in the globe in 2020, a 298 million (or 7%) increase from January 2019.
One noticeable development in the e-commerce sector is the proliferation of public and private efforts designed to increase online purchases. The Indian government has revealed plans to create Bharat Craft, an online marketplace similar to the Chinese company Alibaba. By providing a venue for micro, small, and medium-sized enterprises to promote and offer their wares, this app aims to contribute to the expansion of the national economy.
Improvements in national planning and policy are made to guarantee sustainability and citizen safety. Environmental and social norms in these countries will improve due to more stringent laws, which will impact the success of the e-commerce industry there. Adopting strict sanctions, for instance, will hinder new entrants into the e-commerce market. However, if sanctions are made less severe, it will be simpler for businesses to comply.
When I look at these trends and transitions, I think PROSY is right to invest in e-commerce because it is growing, and its growth pillars are very strong. I also believe that the expected growth is well supported by these growth pillars, which shows how optimistic I am about the opportunities in this market.
Empirical Justification For Investing In E-Commerce
In light of my earlier assertion that I believe e-commerce is crucial to this firm's long-term success, I will present the data I have gathered to support my position. The company's offerings in this exciting industry are best positioned to take advantage of the new opportunities, as shown by the increasing sales.
Strong top-line growth across all four main segments drove the 41% increase in e-commerce revenues to $5.2bn on an economic interest basis. Below is how each segment performed in 2022;
- Classifieds: OLX had a good start to the year. Their sales grew 60% to $1.34 billion based on economic interest. Consolidated sales went up by 64% to $1.22 billion. To maintain profitability over the long term, OLX has prioritized increasing productivity while decreasing overhead. The result is a nine percentage point increase in trading profit margin in core classifieds to 27% (excluding OLX Ukraine).
- Food Delivery: More than 70 nations are serviced by the companies in their food portfolio, the most notable of which are iFood, Delivery Hero, and Swiggy. This division achieved substantial expansion thanks to the attention paid to bolstering profits at the chain's foundational eatery operations. It measured spending on growth extensions like quick service and grocery stores. Sales increased by 52% to $1.9bn, or an increase in GMV of 26%.
- Payments & Fintech – PayU: PayU did well, increasing the number of payments made and looking for more credit and digital banking possibilities. The TPV increased by 49% to $46bn as the number of deals increased by 17% annually. Revenue from economic interest rose $550m (or 55%). The expansion of the credit company in India and increased payment volume in Turkey and Poland drove overall revenue growth of 57% to $412m.
- Edtech: Technology is changing the school system and making it much easier for many more people worldwide to learn. The segment had good top-line growth, with sales going up by 38% to $334m based on economic interest.
The above statistics show that this company's investment in e-commerce is paying off, which means it was worth it. Since the company is still putting more money into the market, I expect sales to keep increasing.
The Profitability Path
PROSY has had difficulty turning a profit, but now it has a detailed strategy to increase revenue by boosting productivity and streamlining operations. The management is eyeing profitability by 2025, which may be feasible according to the rising revenues and if they effectively contain the costs.
Vasileios Sgourdos , the company's CFO, stated: "Second, we are optimizing our already breakeven and profitable core businesses to grow their profits and expand their margins. We are driving efficiencies, improving productivity, and reducing costs."
In driving efficiencies and cutting costs, the company is engaging in a number of initiatives that I believe will yield fruit. At iFood, for instance, they're implementing a minimum purchase value, dynamic pricing for delivery fees, and narrowing the scope of their discounts to increase basket sizes.
Secondly, their abilities in artificial intelligence are impressive and yield substantial financial benefits not only for iFood but for all of their businesses. Additionally, they plan to get out of businesses that aren't profitable. They shut down their businesses where they saw no hope for continued profitability. They are now concentrating on optimizing their more successful businesses, so they have shut down their food delivery company in Colombia and their OLX Auto businesses in Peru and Ecuador.
Finally, they plan to lay off around 30% of the current cooperative workforce to reduce operating expenses. Considering the company's current profitability trajectory and promising investment in e-commerce, which is increasing its top line, I am optimistic that it will reach its 2025 profitability target.
Risks
Despite my optimism, investors should be cautious because of the company's risk. For PROSY, currency fluctuations pose a significant danger. Foreign currency translation had a sizable adverse effect on stated results and growth in the MRQ. The effect on income was substantial, amounting to 7% or $1.2 billion. In light of this effect, it's apparent that the current inflationary economy threatens this business's prospects, which may limit my bull thesis.
Conclusion
Since PROSY operates in the internet service sector, rising expenses have seriously affected the company's ability to turn a profit. The business has set out on an ambitious path to profitability, and I am confident it will eventually bear fruit.
The business has a wide range of operations and has put a lot of resources into the growing e-commerce sector. In my opinion, the company's strength and potential for long-term development and prosperity lie in its products' high quality and ability to help it capitalize on the expanding market. In light of these core strengths, I have a bullish outlook on this business and recommend it.
For further details see:
Prosus: Profitability Path Set As E-Commerce Results Justify Investment