On Monday, Apple (AAPL) stepped boldly into the mobile payments market by officially launching its eagerly anticipated Apple Pay service.
Announced during the company’s main iPhone 6 event on September 9, the unleashing of Apple Pay into retail stores has jolted the mobile payment market – and the companies within it.
On Tuesday, shares of mobile payment companies soared on the back of Apple Pay’s debut.
Except for one company, that is…
A Small Player in an Increasingly Large Mobile Payment Market
Based in Miami, Net Element, Inc. (NETE) is a small mobile commerce and payment-processing company that operates primarily in the United States and Russia.
Well, with a market cap of just $60 million, it’s one of the smallest players in a mobile payment market that’s only getting larger as the number of mobile devices continues to proliferate globally.
Its technology and services allow merchants to accept mobile and cashless payments under the company’s Unified Payments brand, which was founded by Net Element CEO, Oleg Firer, and ranked as Inc. 500 Magazine’s fastest-growing company in 2012.
Net Element’s Aptito platform helps restaurants and hotels boost their reach, interaction, and loyalty with customers via mobile devices.
However, while many of its mobile payment peers have enjoyed riding the wave that Apple Pay created, Net Element shares have dropped recently. From a closing price of $1.81 last Thursday, the stock currently sits at $1.55 – down 14.3%.
So what’s happened?
Net Element was founded in 2004, and – as you might expect with a young company that’s trying to break into an equally young, emerging market – it’s endured a rough start.
The proof is crystal clear in the company’s horrible cash and profit margin numbers.
The bright spot is an enormous jump in revenue – from $1.4 million in 2012 to $18.7 million in 2013. However, while trailing 12-month sales total $22 million, revenue has slowed this year, compared with the same period in 2013.
Part of the company’s 12% drop in second-quarter revenue – from $5.6 million in Q2 2013 to $4.9 million – came as a result of operational restructuring in Russia. Nevertheless, it marked the company’s first profitable quarter, as net income hit $1.3 million – $0.04 per share. That compares to a loss of $20.2 million, or $0.72 per share, in Q2 2013.
In addition, the company announced a “debt exchange transaction” in September that wiped $15.8 million from its debt burden. That will be reflected in the third-quarter results, and should obviously give the firm much more financial wiggle room.
C.H.A.O.S. Meter: 12/20
In terms of impact, Net Element is in the right market at the right time.
But it’s a very competitive one.
The company is making progress, though.
Most notably, Net Element announced that it will incorporate Apple Pay into its own point-of-sale mobile payment technology via the iPhone 6, iPhone 6 Plus, and upcoming Apple Watch devices. As Firer said in a recent letter to shareholders, “Aligning Net Element’s services with one of the most reputable companies in the world is an achievement from which we expect to have long-term benefit.”
In order to develop its own technology, Net Element has filed an S-3 with the SEC, which, if approved, will allow the company to raise up to $50 million to invest into the business.
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C.H.A.O.S. Meter: 15/20
As recently as September 12, Net Element shares hit a 52-week high of $5.75.
Today, the price is $1.55. Ouch.
Part of the reason is the S-3 filing I noted above, which will see a further two million shares of common stock issued at a par value $0.0001 per share.
Share-dilution concerns have hammered the stock, but the hit should be temporary, especially given the company’s venture into profitability and the elimination of that $15.8 million in debt from the balance sheet.
This is a volatile stock that’s prone to lightning-fast acceleration – both up and down. However, SeeThruEquity’s $5.17 target price raise didn’t do much for the shares, and once the Apple Pay news fades, Net Element may revert to a “play the news” kind of trade.
C.H.A.O.S. Meter: 14/20
Net Element recognizes revenue from transactional processing fees associated with “TOT,” its credit-card-processing company, along with “service fees” from mobile payment processing services.
As I noted, revenue is rising, along with profitability, and Apple Pay could prove to be a decent catalyst in terms of further increasing the company’s orders.
Firer says Net Element will “aim to execute its initiatives for accelerated growth with sustained profitability,” as well as “identifying and pursuing strategic opportunities to increase shareholder value.”
C.H.A.O.S. Meter: 12/20
With Apple Pay up and running, it adds further validation to the mobile payment industry – a “multi-billion-dollar market,” according to Firer, and one that’s enjoying a “huge shift.”
He estimates that with “over 60 million potential iPhone 6 and iPhone 6 Plus users” coming online, the mobile payment market will see another big rise that Net Element can tap into.
Indeed, Firer told MissionIR recently that “the sky is the limit from here. We’re looking to make a strong foothold in this industry.”
That’s easier said than done, though.
The climate is going to be fiercely competitive. Even more so now that PayPal is splitting off from eBay (EBAY) as its own separate entity.
As a result, there’s a strong likelihood that this emerging market could offer very low margins. For a giant like Amazon (AMZN), that’s no biggie. But for Net Element, it could prove disastrous.
C.H.A.O.S. Meter: 13/20
OVERALL C.H.A.O.S. RANKING: 66/100
Final Verdict: I like Net Element as a quick trade. And at current depressed levels, you might want to consider jumping in. Especially since Firer projects a positive end to 2014, with the third-quarter results on November 17 providing a big near-term catalyst.
Your eyes in the Pipeline,