Mogo Finance Technology is Banking on Strong User Growth, Blockchain

Shares of Mogo Finance Technology Inc. (TSE:MOGO) have surged more than 30% after announcing plans to integrate Bitcoin and other cryptocurrencies into its digital accounts

SmallCapPower | November 15, 2017: Mogo Finance Technology Inc. (TSX:MOGO) is a financial technology company focused on building the best digital financial services platform in Canada. From being just a consumer lender, Mogo Finance Technology has evolved into a diversified business platform offering credit score monitoring, cards, mortgages and the soon-to-be-launched cryptocurrencies. Strong quarterly results along with the user base crossing the half-a-million mark highlight this transition and bodes well for the Company to position itself to capture an increasing share of the shift to digital financial services in Canada. In terms of valuation, Mogo Finance Technology stock looks reasonable at a market cap of just $109 million, or 5.0x its TTM revenues. On a forward basis, the multiple could be much lower as the Company is poised for multi-fold growth in revenues over the next few years on its accelerating user base and the resulting monetization.

Investment thesis

  • Transforming into Canada’s leading financial services platform
  • Accelerating memberships – exceeds 500k in 3Q17
  • Multiple new product launches including Blockchain planned in the near future

Evolving into Canada’s leading financial platform

Mogo Finance Technology continues to make rapid strides in transforming itself into Canada’s leading financial services platform rather than just being a consumer lender. Since launching Mogo’s new digital platform in 3Q16 with a MogoAccount and iOS app and personal loan products, Mogo Finance Technology continues to build Canada’s leading digital financial services experience by introducing several products over the past year including credit score monitoring product (4Q16), MogoMortgage (1Q17), and MogoCard (2Q17). The platform delivers all these products at scale and enables the launch of additional new innovative products all within the same digital account. 

Key features of Mogo Platform:

  • Canada’s first free credit monitoring solution
  • MogoMortgage: Digitally led mortgage experience, which recently was awarded Best Use of Mobile Technology by the Canadian Mortgage Association
  • MogoCard: Canada’s first digital spending account with Prepaid Visa
  • MogoMoney: Canada’s first full-spectrum consumer loan solution with “Level-up” program that rewards consumers for consistent payments

Memberships cross 500k milestone in third quarter; expected to reach one million by 2020

Canadians continue to embrace Mogo’s innovative digital financial products and value proposition as they look for simpler and more convenient ways to control their financial health. Driven by new digital finance products and growing brand awareness, Mogo Finance Technology members continue to grow at a rapid pace. The Company announced on November 1 that its members exceeded the half-a-million mark (500,000), doubling their member base since August 2016, for a 68% growth rate.

Large monetization opportunity: Canada is still at the early stages of a shift to digital financial services, as per the recent EY FinTech Adoption Index, which notes the number of Canadians that have used a FinTech service has doubled in the past two years, but is still less than 20%, compared with over 60% in some countries. This presents a large opportunity for Mogo Finance Technology, which continues to find increasing acceptance of its platform among Canadian consumers. The Company has a three-year target (2020) of reaching 1.0 million members. Assuming the conservative current average revenue per member (ARPM) of $108, revenues could exceed $100 million by 2020. We note that the ARPM for the Top 10 Credit Unions in Canada stands at $1,308. Hence, any further improvement in ARPM of Mogo Finance Technology could further increase its revenue potential over the coming years.

Strong third-quarter results

Mogo’s strong third-quarter revenues showed an increasing contribution from other product revenue and fees, which also highlight the Company’s transition to a diversified financial platform than just a consumer lender. Mogo’s Founder David Feller noted that its third-quarter results represented an important inflection point for Mogo as the Company delivered over ~60% growth in other product revenue and fees, representing 30% of overall revenues.

Total revenue in 3Q17 grew 10% sequentially to $12.6 million, driven primarily by the growth of other product revenue and fees and loan interest. Gross profit margin jumped to a record 68% versus 60% in the prior-year quarter, driven by the growth of higher-margin fee-based products and strong credit performance. Mogo Finance Technology reported its fifth consecutive quarter of positive-adjusted EBITDA at $1.0 million. During the quarter, the Company finalized a new senior secured credit facility of up to $40 million, expanding total credit facilities to $250 million.

Mogo Finance Technology plans to launch several new products over the coming months including MogoProtect, an identify fraud protection product, and a crypto account. The Company had already announced the launch of crypto accounts on October 30, with implementation by 1Q18. With crypto accounts, Mogo Finance Technology members can buy and sell Bitcoin within their MogoAccount. For this purpose, the Company plans to use dedicated Blockchain capabilities to accelerate its plans to integrate Bitcoin and other cryptocurrencies into the MogoAccount. Post the announcement of its entry into Blockchain, the Company’s shares zoomed 31%.

Outlook and valuation

Mogo Finance Technology with its differentiated financial digital platform along with the continued launch of new products is well positioned to increase its user base and monetize them for growing its revenues. The Company expects continued growth in other product revenue and fees, targeting 50% of total revenue from this segment by 2018 year end. This shift should also improve margins going forward. The current market cap stands at only $109 million, or 5.0x its trailing 12-months sales, which looks attractive compared to other financial tech companies as well as that of the Big 5 Canadian banks. On a forward basis, the multiple looks even more attractive as Mogo Finance Technology is poised for a multifold growth in revenues over the next few years on accelerating user base and the resulting monetization.

Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in the company mentioned above.

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