Nayax Looks Like A Buy Right Now

It has been quite a while since I've found any Green Screen stock to get excited about buying right away.

There is no shortage of great companies on the Green Screens right now. A number of them we are tracking already in the Watch List. I'm keeping an eye on even more outside of that.

The big issue right now is simply pricing. The stock market has had a very good 2024, with the S&P 500 up 26% to date. A lot of great companies on our Green Screens are up far more than that. Based on my valuation work, the stocks of indisputably great companies like Nvidia (NVDA), Meta (META), Shopify (SHOP), and others trade 50-100% above any kind of reasonable fair value calculation. So, I haven't even bothered to write them up yet.

After the weekly update this week, however, I've identified a new entry that looks both attractive from a business AND stock valuation standpoint. It gets added to the Buy List immediately! Let me tell you about Nayax (NYAX).

How Nayax Makes Money

Nayax provides a full technology platform for enabling "unattended commerce" point-of-sale operations. For example, have you ever paid at a vending machine with Apple Pay? That was likely enabled through a Nayax terminal. Pretty much anywhere you can pay for goods or services without a human attendant, Nayax's platform could be used.

That's quite a few use cases - and growing! In addition to vending machines of all sorts, Nayax devices can be seen on checkout counters, self-service kiosks, food trucks, car wash stations, laundromats, EV charging stations, and many more.

In addition to the point-of-sale devices that facilitate payment processing, Nayax also offers a software-as-a-service (SaaS) management platform that covers telemetry, financial reporting, inventory, analytics, business analysis, and so forth. Customers can see how every single one of their unattended point-of-sale endpoints is performing at any time.

The company earns revenue in 3 ways.

First, it earns hardware revenue on sales of its POS terminals. This is about 25% of revenue at a gross margin of roughly 30%.

Second, it earns recurring subscription fees for access to its SaaS platform. SaaS fees account for close to 30% of sales.

Finally, Nayax takes a 2.75% fee for every dollar processed through their system. Payment processing fees are the largest piece of the pie at 45% of total sales.

Nayax is a global company, operating in 80 markets and currencies, and offering over 80 ways for customers to pay. Its largest geographies are North America (38%), Europe (25%), and the UK (12%).

Is Revenue Recurring and Growing?

Nayax's SaaS subscription fees and payment processing take are both classically recurring revenue models. In the most recent quarter, recurring sources of revenue were 72% of total sales, and grew 49% year-over-year, far outpacing transactional hardware sales. I expect that recurring revenue will ultimately reach 80-85% of total sales, making this a very recurrent sales business.

The growth case is strong. Nayax has delivered a 44% 3-year CAGR. In the most recent quarter, sales grew 38%, device sales were up 40%, customer count swelled 52%, and transactions value was up over 30%. Management expects 35% or higher annual sales growth for a *long-term* target - pretty aggressive! The growth outlook is strong.

And why not? There are a ton of avenues for growth here. Retail has been trending towards contact-less for some time now, accelerated by the COVID pandemic. The possibilities for human-less point-of-sale are endless. Think of what's happened in parking garages and entertainment venues just in the past few years and extrapolate that to general point-of-sale use cases. There's an exciting opportunity for Nayax to grow.

Geographic expansion is another big opportunity. This company is just now entering the lucrative Latin American and Asia/Pacific markets. Even modest success in those areas represents a 2x revenue opportunity at the very least.

On revenue recurrence and growth potential, Nayax scores a solid "YES".

How's The Moat?

Nayax is a business with attractive switching cost economics. Rolling out its POS system is an expensive and time-consuming endeavor, and once in place there will be little motivation to change it. What's more, Nayax can grow revenue as their clients grow their businesses, adding more POS terminals and collecting more in processing fees. This can be seen the firm's very attractive 130% dollar based retention rate, meaning the average client is growing sales 30% year-over-year.

There is competition in the self-service payment space. Cantaloupe, CPI, and Ingenico are the primary direct competitors. It's fair to say that the space also represents a potential market for a ton of gigantic payments firms, including the likes of Stripe, PayPal, Toast, and Square (just to name a few). Competition for new business is a risk, although this is a pretty large pie - there is room for plenty of winners here. Nayax has a strong advantage as a first mover in the space.

Overall, I think Nayax has more-than-acceptable economic moat characteristics.

Leadership and Financials

Nayax has the founder-based leadership we are always looking for in potential investments. The company was founded by Yair Nechmad, his brother Amir, and David Ben Aviv back in 2005 (this is an Israeli company).

Today, Yair remains as CEO, while Ben Aviv is CTO and Amir serves as a director. Collectively, the three own close to 75% of outstanding shares. That gives them a tremendous motivation to grow the business long-term, aligning their interests with ours.

To date, their leadership has been excellent. We've mentioned the company's excellent growth rates, economic moat factors, and segment leadership. This has been accomplished while maintaining a strong balance sheet with reasonable levels of debt. While Nayax has not been much of a free cash generator to date, this is changing rapidly, and the firm expects to be FCF positive going forward. I see no reason it can't achieve that, eventually getting to ~20% free cash margins as is typical for the industry.

Risks

The primary risk I see in Nayax is the company being unable to improve its cash generating ability, thus falling short of our fair value modeling. As mentioned, this was a cash burning operation up until very recently, and we're making some assumptions it may not be able to reach.

Aside from that, there are a few other potential risk factors. One of the big payment firms deciding to enter the "unattended" space would certainly spook investors and drive the price down.

Nayax has been somewhat acquisitive, although to date they have been measured acquisitions. A really large, "transformative" acquisition would make me re-consider management's growth strategies.

Finally, this is an Israeli firm, and we all know of the troubles in that region at present. An escalation of the Gaza war into a more regional (or, god forbid, global) conflict could lead to a lot of investor concerns and drive stock prices down.

So those are some real risks. Still, payment processing is a very steady, reliable business model in general, and I'd classify Nayax as no more than a "moderate" risk pick.

Conclusion

I'm excited about adding Nayax to the Buy List. This is a business that is growing rapidly, has a highly recurrent and sticky revenue model, is run by founders with massive financial stakes, and is well-positioned in what looks like a long-term retail trend. GreenDot Stocks has done really well with these kinds of businesses to date (Toast, Flywire, and Global-E are all up 50-100%). I truly feel that Nayax will be another big winner for us.

Now, what is it worth? I've used a 30% annual growth rate over the next 5 years, below the company's aggressive 35% target. I've targeted free cash flow at 21% of revenue, well above current margins, but also well below management's long-term 30% EBITDA goal (and in-line with the payment processing industry at large). Dilution is set at a high 6% annual figure. All of this is discounted quite steeply, requiring a 12.5% annual return. Running those figures though the model, I get a fair value price of $71 for NYAX.

Given that the stock currently trades under $30, that's quite a large margin of safety!