i3 Verticals Inc: Payment Solutions Stock Could Generate Great Returns

payment solutions stocki3 Verticals Inc: The Next Great Payment Stock?

The emergence and the ongoing state of the COVID-19 pandemic provided rocket fuel for many payment technologies stocks to lift off to record heights. But even before the pandemic, the sector was already witnessing accelerating demand for electronic payment solutions.

On the smaller end, a good risk/reward opportunity in this space is i3 Verticals Inc (NASDAQ:IIIV). i3 is a provider of integrated electronic payments and software solutions, including point-of-sale, e-commerce, and mobile. Clients include small- and medium-sized businesses and government.

IIIV stock fell to $13.01 during the March sell-off prior to nearly doubling to the current level. Yet, i3 Verticals Inc is still well below its 52-week high of $37.90, down 11.6% this year.

The current bias is slightly down, but i3 Verticals stock could rally, supported by the strengthening of the relative strength index and moving average convergence/divergence.

Chart courtesy of StockCharts.com

Watch for downside risk at $22.00. The upside technical targets include the 50-day and 200-day moving averages followed by trendline resistance around $29.00. A breakout could see IIIV stock recover the pre-COVID levels at $32.00 to $38.00.

My Bull Case for IIIV Stock

i3 Verticals is coming off three consecutive fiscal years (ending September) of double-digit growth that propelled revenues by 88% to a record $376.3 million in fiscal 2019.

Fiscal Year Revenue (Millions) Growth
2016 $199.6 N/A
2017 $262.6 32.50%
2018 $323.5 23.20%
2019 $376.3 16.30%

(Source: “i3 Verticals, Inc.,” MarketWatch, last accessed October 2, 2020.)

But i3 Verticals changed the way it presented revenues. The change will see lower revenues presented, but there is no impact on earnings.

After the change, IIIV revenues would have been $137.6 million in fiscal 2019. This is expected to rise 9.5% to $150.6 million in fiscal 2020 and 15.5% to $173.9 million in fiscal 2021. (Source: “i3 Verticals, Inc. (IIIV),” Yahoo! Finance, last accessed October 2, 2020.)

i3 Verticals is producing positive earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted earnings, and free cash flow (FCF).

EBITDA grew in fiscal 2017 and fiscal 2018 before a slight decline in fiscal 2019.

Fiscal Year EBITDA (Millions) Growth
2016 $16.3 N/A
2017 $17.5 7.00%
2018 $28.1 60.70%
2019 $28.0 -0.40%

(Source: MarketWatch, op. cit.)

While i3 Verticals is showing generally accepted accounting principles (GAAP) losses, IIIV is delivering adjusted profits.

Fiscal Year GAAP Diluted EPS Growth
2016 -$0.23 N/A
2017 $0.10 143.10%
2018 -$0.78 -889.00%
2019 -$0.29 62.90%

(Source:MarketWatch, op. cit.)

On an adjusted basis, i3 Verticals Inc reported profits of $0.83 per diluted share in fiscal 2019. This is estimated to contract to $0.75 per diluted share in fiscal 2020 prior to jumping to $0.99 per diluted share in fiscal 2021. (Source: Yahoo! Finance, op. cit.)

i3 Verticals has also been FCF positive for four straight fiscal years, with strong growth in the last two fiscal years.

Fiscal Year FCF (Millions) Growth
2016 $9.1 N/A
2017 $7.1 -22.40%
2018 $15.9 123.60%
2019 $25.8 62.60%

(Source: MarketWatch, op. cit.)

Analyst Take

i3 Verticals stock is in institutional favor, with 138 institutions owning 97.7% of the outstanding shares

i3 Verticals valuation is reasonable for a small technology growth stock. IIIV stock trades at 26 times its consensus earnings per share (EPS) for fiscal 2021 and 23 times the high estimate.

I like the strong tailwinds in the payment technology space and feel IIIV stock can benefit from what will be superlative growth.