Qiwi: Growth Story Likely To Be Over (NASDAQ:QIWI)

Qiwi: Growth Story Likely To Be Over (NASDAQ:QIWI)


The sale of consumer lending service SOVEST for a loss marks the exit of Qiwi from the banking business.

As Russia continues to struggle with the pandemic and the betting industry is about to experience its first major decline in years, Qiwi’s growth story is likely to be over.

There’s too much uncertainty associated with Qiwi’s stock and we believe that it’s better to avoid it and look for other opportunities.

The sale of consumer lending service SOVEST for a loss marks the exit of Qiwi (QIWI) from the banking business. A couple of months ago, the company also decided to close its mobile bank Rocketbank, which was purchased in 2017, after it didn’t find any buyers. As of today, Qiwi is now solely a payment processing service in Russia without any competitive advantages. While the company had a great performance in Q1 and is not overvalued to its international peers, we believe that Qiwi’s growth has stalled and it will not be able to create value in the foreseeable future. Qiwi’s exposure to the shaky Russian economy and the betting industry are the main reasons why we believe that the company’s stock is not an attractive investment for growth or value investors.

The Shaky Environment

As a leading fintech firm in Russia, Qiwi has 21.8 million virtual wallets and more than 127 physical terminals all around the country. By being a payment processing company, Qiwi wasn’t affected much by COVID-19 at the beginning of the year and was able to show a good performance in Q1. Its revenues increased by 17% Y/Y to $80.5 million, below the estimates by $3.46 million, while the GAAP EPS was $0.33. With Forward P/E and EV/EBITDA ratios of 13x and 4x, respectively, Qiwi trades below the industry’s median. Besides good valuation multiples and a strong performance in Q1, we don’t see any catalyst for growth, which could’ve made the company’s stock an attractive investment for value or growth investors.

Source: Capital IQ

Last year Qiwi announced its intentions of exiting the banking business and started to look for buyers for its mobile bank Rocketbank, which it purchased in 2017 from another Russian bank called Otkritie. After failing to find a buyer, Qiwi announced a few months ago that it would shut down Rocketbank. Rocketbank itself was a mobile bank that targeted millennials and Gen Z consumers and was giving them access to major financial tools like deposits and savings accounts via a mobile app. The main reason why Qiwi wanted to enter the banking business in the first place is that it didn’t have any competitive advantages against other payment processing services. However, Qiwi wasn’t able to use the resources of Rocketbank efficiently, and pivoting to banking was a major disappointment for the company’s shareholders. In his latest interview with Russian TASS, Qiwi’s CEO Boris Kim said that the company was unable to effectively use the deposits and available funds of Rocketbank to grow its consumer lending service SOVEST. As both projects were not showing any signs of growth, Qiwi had no other choice but to shut down Rocketbank in March and sell SOVEST for $82 million to Sovestbank in June for a loss of approximately $11 million.

After exiting the banking business, Qiwi focused on growing its payment processing business. In recent years, the business started to grow at double-digit rates thanks to its popularity inside the sports betting industry. Qiwi’s revenues from the betting industry more than doubled from 6.9% in 2016 to 15.5% in 2018. In 2019, the fees from the betting industry accounted for 35% to 40% of Qiwi’s total revenues. All of this was accomplished thanks to the legalization of online bookmakers in Russia in 2014.

Qiwi makes money by signing partnership deals with major sports betting companies and charges its users a 3.5% commission for depositing the funds on betting platforms and a 5% withdrawal fee. While Qiwi was able to benefit from the legalization and the growth of the industry in recent years, the spread of COVID-19 will have negative consequences for the company this year. In the latest earnings call, the management of the company mentioned that the pandemic would be the major challenge for the business in the upcoming months. As major sports leagues are not reopened yet, there’s a high chance that the betting revenue will substantially decrease this year in comparison to 2019.

Another downside of owning Qiwi is its exposure to Russia. Right now Russia is the fourth country with the biggest number of total cases of COVID-19 in the world. The virus puts immense pressure on the country’s economy and its health system. In comparison to the Western countries, Russia cannot create massive stimulus programs to its households, which could’ve eased the economic pain from the pandemic. The maximum that the country’s Central bank could’ve done is to decrease its interest rate to historic 4.5%, which pushed the country’s inflation to 3.2%. As an energy exporter, Russia also greatly suffered in the last few months from the historically low prices for oil and natural gas. In addition, in late March the Russian ruble depreciated by more than 30% in comparison to USD and only recently rebounded and the total depreciation from the beginning of the year is around 20%. This has negative implications for Qiwi since out of its $33 million in cash reserves, only half of them are denominated in USD, while the other half is denominated in RUB.

As Russia continues to struggle with the pandemic and the betting industry is about to experience its first major decline since its legalization in 2014, Qiwi’s growth story is likely to be over. The inability of the company to successfully pivot to banking should be considered a major disappointment. After spending years developing its banking products, Qiwi once again became solely a payment processing company with no competitive advantages, and now it needs to find a way to thrive in an environment with no growth. As there’s too much uncertainty associated with Qiwi’s stock, we believe that it’s better to avoid it and look for other opportunities.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Originally published on Seeking Alpha

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