Could This Tiny Tech Stock Be the Next PayPal?

UEPS Technologies
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Net 1 UEPS Technologies Worth a Closer Look

The demand for non-online payment solutions, especially in emerging markets, is significant. A small-cap South African company that looks intriguing in this space is Net 1 UEPS Technologies Inc (NASDAQ:UEPS).

The company provides payment solutions, transaction processing services, and financial technology in South Africa and emerging markets.

This is an overlooked market that is difficult to serve, but the demand for payment and transaction solutions is growing.

Take the case of South Africa—the third-biggest economy in the African continent after Nigeria and Egypt. The $294.0-billion gross domestic product (GDP)—according to 2016 statistics—is tiny compared to that of the United States, but it’s growing and is expected to drive up demand for alternative payment systems.

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Net 1 UEPS Technologies is not your average high-flying U.S. payment solutions company, but the upside price appreciation potential is significant.

At the core of its business is its smart card Universal Electronic Payment System (U.E.P.S.), which allows users who don’t have access to the traditional banking system to transact with each other, or with companies. In South Africa, for instance, people on welfare or pensions can have the funds deposited on smart cards.

The company has issued over 30 million cards in over 10 emerging countries, and is looking to expand into regions in China, Asia-Pacific, Europe, Africa, and the United States.

Also ReadBest Mobile Payments Stocks in the Mobile Technology Revolution

I like the story behind Net 1 UEPS Technologies stock, which is trading down 11.5% year-to-date and offers traders a good risk-to-reward investment.

Growth Supports Bull Thesis for UEPS Stock

Net 1 UEPS Technologies has a market cap of around $571.3 million and it produced revenues of $610.07 million in FY17, which ended in June.

Trading at just about 0.9-times its FY17 revenues, UEPS stock looks attractive.

Revenue increased from FY13 to FY15, prior to a decline in FY16. This was followed by a 3.3% bounce in FY17. Gross margins held at around 52%.

Revenue growth is expected to stay muted at 1.1% in FY18, prior to an improvement of 7.3% to $661.87 million in FY19. (Source: “Net 1 UEPS Technologies, Inc. (UEPS),” Yahoo! Finance, last accessed September 25, 2017.)

Net 1 UEPS Technologies consistently makes money, which is terrific for a smaller company.

For FY18, Net 1 UEPS Technologies is expected to earn $1.64 per diluted share followed by $1.84 per diluted share in FY19.

On a quarterly basis, UEPS has delivered an earnings per share (EPS) beat in 13 of the last 16 quarters, from the start of calendar-year 2014.

Meanwhile, the balance sheet carries about $4.05 per share in net cash, which accounts for 40% of the UEPS stock price. The cash has increased in five straight fiscal years while debt has declined each year.

A look at the technical picture of UEPS stock shows that the stock appears to be pausing and figuring out the next move.

UEPS stock chart

Chart courtesy of StockCharts.com

The daily chart shows Net 1 UEPS Technologies at a crux; it’s looking to break above some resistance at around $10.25. If this happens, we could see a move to $10.90 and $12.00. This is followed by price targets of $14.00, $18.00, and $20.00. The five-year high was $21.48 in August 2015, while the all-time high was $33.82 in November 2007.

UEPS price chart

Chart courtesy of StockCharts.com

Analyst Take: 

The technical view supports a potentially much higher stock price.

Net 1 UEPS Technologies trades at a bargain 5.52-times its FY19 EPS and has a price/earnings to growth (PEG) ratio of 0.58. This means UEPS stock trades below its estimated five-year earnings growth.

If you need more proof to support a rally, Net 1 UEPS Technologies also trades  below its book value.