Spruce Point Capital Management, LLC (“Spruce Point” or “we” or “us”), a New York-based investment management firm that focuses on forensic research and short-selling, today issued a detailed report entitled “Fool Me Once, Twice, Three Times, But Not Four” that outlines why we believe shares of Nuvei Corporation (NASDAQ: NVEI) (TSX: NVEI) ("Nuvei" or the "Company"), face up to 35% to 50% long-term downside risk, or $21.22–$27.59 per share. Download or view the report by visiting www.SprucePointCap.com and follow us on Twitter @SprucePointCap for additional information and exclusive updates.
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Spruce Point Report Overview
Nuvei is a Montreal-based payment technology solutions provider to merchants and partners, predominantly in North America and Europe. In a report released December 8, 2021, Spruce Point previously outlined concerns about management’s biographical misrepresentations, dubious acquisitions, exposure to high-risk and ESG-unfriendly industries and its high likelihood of failing to meet aggressive financial expectations. The stock subsequently collapsed by 75% (more than Spruce Point’s 60% maximum downside prediction) and Nuvei revised both short and long-term guidance lower. However, Nuvei’s share price is up 67% YTD 2023 on what we believe is the false hope that the worst is behind it, financial targets are more attainable, its recent Paya acquisition will succeed and that its valuation is inexpensive.
Our latest concerns that we outlined in our new report are as follows:
- Nuvei obscured the extent of its digital and crypto exposure, had an FTX partnership and reportedly also an FTX equity interest. A former Simplex Nuvei executive we spoke with believed that Nuvei had equity ownership in FTX, an insolvent crypto exchange whose CEO, Sam Bankman-Fried, is being charged with fraud and money laundering, while other FTX executives have pled guilty. Nuvei is a creditor in FTX’s bankruptcy filing. If true, Nuvei failed to transparently disclose its full interest while announcing an FTX partnership that facilitated the movement of funds into FTX. Public promoters and shareholders of FTX are being sued on the grounds that they allegedly aided the FTX misconduct and failed to disclose their financial interests in FTX. Nuvei should disclose any revenues or pecuniary benefits it received from FTX. We believe Nuvei also did not provide investors a transparent view of its total crypto and digital exposure, which we believe increased after it acquired Simplex for $290 million in September 2021. Based on our research, we believe Simplex’s margins have materially compressed, and Nuvei is delaying impairment. Nuvei recently said up to 33% of revenues were tied to crypto and digital, but its prior disclosures suggest that the total exposure was from the low teens to 22%.
- Why did Nuvei hire FTX’s former Global Head of Payments as a Senior Vice President? Adam Cole Jacobs left FTX as Global Head of Payments after the firm’s collapse in November 2022 and quickly landed a plum corporate job as SVP of Corporate Development at Nuvei in December 2022. Based on our investigation, we find that he advised multiple defunct companies with ties to known stock promoters with a list of unsavory allegations. Among our concerns is Mr. Jacobs’ equity ownership in Spend.com and Advisory Board role at i-House. Spend’s Executive Board Advisor was Stan Bharti. Mr. Bharti is known for promoting small-cap mining companies and has faced shareholder allegations that he siphons excessive fees while public shareholders are left with underwater stock. Mr. Bharti has also been connected to felon Jordan Belfort known as “The Wolf of Wall Street.” There are multiple public references alleging that Spend.com was stealing from customers. At i-House, Mr. Jacobs advised founder Ricky Ng, the co-founder of iClick Interactive Asia Group (Nasdaq: ICLK), a troubled stock promotion that languishes below cash value. This is a likely indicator that investors don’t believe the accuracy of iClick’s reported cash or see a viable future for the company. Mr. Ng’s i-House announced a partnership with Ideanomics (Nasdaq: IDEX), a company which has also been targeted by short sellers who have alleged it to be a pump and dump and is now a penny stock. Mr. Jacobs co-advised i-House with Sergey Grybniak, who was charged by the SEC with conducting a fraudulent Initial Coin Offering (ICO).
- Nuvei’s $1.3 billion levered acquisition of Paya Holdings appears troubled from numerous angles. In early January 2023, with its crypto ambitions fizzling, Nuvei announced the acquisition of Paya Holdings (Nasdaq: PAYA). Paya, formerly Sage Payment Solutions, was acquired by private equity firm GTCR in 2017 from The Sage Group plc (LSE: SGE) for $260 million. After a few private acquisitions and the benefit of a red-hot market for funding SPACs, FinTech Acquisition Corp III (Nasdaq: FTAC) announced its intention to acquire Paya in August 2020 and closed the deal in October 2020. Based on our analysis, Paya was experiencing growth challenges including loss of market share, rising acknowledgment of alternative competition and slowing revenue growth. Yet, a cursory review of its 2022 performance would indicate strong double-digit volume, revenue and cash flow growth. We believe integrated software vendors (ISVs) that offer bundled solutions to merchants are pressuring Nuvei. Prior to the acquisition, the market expected Nuvei to have stable EBITDA margins. Based on our analysis, Nuvei’s 2023 implied EBITDA margin (excluding the Paya acquisition) is falling from 41.7% to 40.1% – 40.9%. More striking, we estimate that Nuvei’s organic (ex: Paya) dollar of revenue and EBITDA per dollar of volume is forecasted to decline by low single digits. These results are mirrored by a close forensic examination of Nuvei’s annual report and year-end earnings. In its latest annual report, Nuvei ceased providing metrics on new cohort sales and expanded risk factors about increasing sales from existing customers and attracting new ones. In March 2023, Nuvei’s Chief Commercial Officer Motie Bring departed.
- We have extreme concerns about Paya’s customer description. Paya has made multiple drastic revisions to its “customer” claims, undermining our confidence in their accuracy and indicating extreme embellishment. Ahead of the August 2020 SPAC deal announcement to IPO Paya, it made material revisions to its customer and partnership claims on its website. “Customers served” declined from 1 million to 100,000+, and 1,000 partnerships disappeared, yet processing volumes increased by $3 billion. How is this possible? Paya then shifted its description from 100,000+ “customers” to 100,000+ “businesses” while its e-commerce ranking declined. Even more striking, in the final two public communications before going private, Nuvei referenced Paya as having “more than 100,000 customers”, while Paya’s 10-K filing ahead of closing finally revised the language to “approximately 100,000 businesses.” Spruce Point confirmed with a former Paya executive that it never had 1 million customers and that actual active customers’ transacting volumes were closer to 80,000.
- Our other grave concerns with Paya extend to its organic revenue growth and cash flow representations. We believe Paya did not clearly disclose its organic growth by detailing contributions from acquisitions and the effects of inflation. However, we take a larger issue with Paya’s frequent and large acquisitions of customer lists. These list acquisitions were ignored by management and the analyst community, but we believe they are inorganic contributions to volume, revenue and financial performance being accounted for as organic. In fact, in 2021, Paya disclosed a massive $17 million customer list acquisition, which we believe may have temporarily inflated results ahead of the acquisition. When we inquired about the cost of purchasing a customer list with medium-sized businesses in Paya’s targeted growth industries (healthcare, government, education, etc.), we were quoted just $8,500 for a list of 157,000 potential customer leads, not $17 million. Paya’s cash conversion metric conveniently ignores the cost of customer list acquisitions. For reference, Spruce Point could only identify Deluxe Corporation (NYSE: DLX) as disclosing customer list purchases. Deluxe is in the email marketing business and is 8x bigger than Paya in sales. In the last five years, Deluxe has spent $18.2 million on customer lists vs. $32.8 million spent by Paya. Deluxe also applies an accelerated amortization expense method which recognizes expenses faster vs. Paya which uses a straight-line method. Alternatively, list purchases could be viewed as sales and marketing expenses, and instead of capitalized and amortized over five years, could have been expensed and would have lowered current EBITDA and profits.
- Nuvei’s recent stock price and valuation expansion post-closing of Paya is unwarranted. We warn of 35% - 50% downside risk. Nuvei is exposed to slowing inflation and consumer spending. Our analysis also suggests that its underlying economics are deteriorating and that it is heavily reliant on buoying its stock price as a tool to attract, retain and compensate employees. We believe the current sell-side analysts projecting lofty share price appreciation fail to incorporate our concerns with the Paya acquisition and assume Nuvei will be successful despite its documented recent history of failing to extract value from acquisitions. By applying a discounted 4.0x – 4.5x and 8.5x – 10.5x multiple range to optimistic 2023E sales and EBITDA targets, we arrive at a price target of $21.22–$27.59 per share (35% – 50% downside risk).
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Please note that the items summarized in this press release are expanded upon and supported with data, public filings and records, and images in Spruce Point’s full report. As a reminder, our full report, along with its investment disclaimers, can be downloaded and viewed at www.SprucePointCap.com.
As disclosed, Spruce Point has a short position in Nuvei Corp. and owns derivative securities that stand to net benefit if its share price falls.
About Spruce Point
Spruce Point Capital Management, LLC is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities. Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.
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