Many American investors tend to avoid Russian stocks due to concerns about political risks, possible sanctions, and currency headwinds. Some high-growth Russian tech stocks were, however, tossed out with the bathwater in recent years.
One such stock is Qiwi (NASDAQ: QIWI), a mobile payments processor often called the "Russian PayPal (NASDAQ: PYPL)." Qiwi lost nearly 40% of its market value over the past 12 months, even though its revenue is still growing at double-digit rates. Let's take a closer look at Qiwi and see if it's a hidden gem or a lump of coal.
What does Qiwi do?
Qiwi is based in Cyprus, but it generates most of its revenue from Russia. It provides online payment services in Russia, Kazakhstan, Moldova, Belarus, Romania, the United Arab Emirates, and other overseas markets. Users can send payments via online and mobile channels, or through its network of over 150,000 kiosks and terminals.
Qiwi Wallet, which provides customer-to-merchant and peer-to-peer transfers, is similar to PayPal's core app. Its total number of Wallet users rose 13% annually last quarter to 20.3 million. Like PayPal, Qiwi provides Visa-branded prepaid cards. It also offers pay-by-installment card systems through its SOVEST brand, along with other value-added services.
Qiwi recently acquired two other banking brands, Tochka and Rocketbank, to expand its presence with small to medium-sized enterprises (SMEs). The acquisition of those brands, which were previously held by Russian banking giant Otkritie, formed the foundation for a new joint venture between Qiwi, Tochka, and Otkritie earlier this year. Otkritie nearly took a majority stake in Qiwi last year, but the deal was terminated after an insufficient number of shares were tendered.
How fast is Qiwi growing?
Qiwi's adjusted net revenue rose 41% annually to 4.1 billion rubles ($71.6 million) last quarter as its Payment Services segment revenue rose 26% to 3.7 billion rubles ($64.1 million). Its total Payment Services volume climbed 20% to 249.2 billion rubles ($4.4 billion). Qiwi attributes that growth to rising e-commerce and money remittance transactions.
Qiwi's first quarter figures include its new revenues from Tochka and Rocketbank. The launch of those projects (especially Tochka and its tech service agreements with Otkritie) boosted Qiwi's revenues from SMEs to 420 million rubles ($7.3 million), compared to nothing in the prior year quarter.
For the full year, Qiwi expects its adjusted revenues to rise 15%-20%, compared to its prior forecast for 12%-16% growth. Its updated forecast includes revenues from Tochka and Rocketbank for the first half of the year, while its older forecast assumed no meaningful revenue from the two brands.
This means that Qiwi's ADR shares currently trade at about 3.5 times the midpoint of its adjusted revenue estimate for 2018, but that valuation could fluctuate due to changing foreign exchange rates. By comparison, analysts expect PayPal's revenue to rise 18% this year, but the stock trades at almost seven times that estimate.
How profitable is Qiwi?
Qiwi's top line growth looks promising, but its bottom line growth is less encouraging. Its adjusted EBITDA slid 5% to 1.45 billion rubles ($25.3 million) last quarter, its adjusted net profit dropped 15% to 1.08 billion rubles ($18.9 million), and its net profit from its Payment Services segment tumbled 27% to 2.2 billion rubles ($38.6 million).
Qiwi attributes those declines to higher expenses related to its SOVEST and Tochka projects, higher advertising and client acquisition expenses, and higher administrative and credit loss expenses. Higher tax rates and unfavorable foreign exchange headwinds also took a bite out of its net profits.
For the full year, Qiwi expects its Payment Services net profit to rise 10%-15% as a few headwinds fade and it reaps the benefits of the Tochka and Rocketbank deals. However, it still expects its adjusted net profit to decline 0%-10%. Qiwi's ADR shares currently trade at roughly 15 times the midpoint of that estimate assuming share counts and foreign exchange rates remain constant. Investors should also note that many websites still report that Qiwi pays a 5% dividend yield -- but it suspended that dividend last year.
Those numbers compare poorly to PayPal's estimated growth rate of 23% this year. PayPal's stock is certainly pricier at 36 times this year's earnings, but that premium is justified by its growth.
The verdict: Stick with PayPal for now
PayPal generates more stable returns than Qiwi, and it also has a presence in the Russian market. Qiwi's prospects might improve once it stabilizes its earnings growth and the ruble rebounds, but the potential rewards don't outweigh the risks yet. I'm keeping an eye on this stock, but I probably won't buy it anytime soon.
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