MOGO stock moves. MOGO stock spike with same day reversal. What happened?

I recommended MOGO stock in January 2020 in this article:

At that moment I ranked the MOGO as ‘BUY’ at $2.53. With lack of news and COVID, the stock declined to sub $1 until recently. I must admit I doubled down on it twice during that time and my average is $1.36.

On July 14th, the stock closed at $0.93. On July 15th, the stock moved premarket on news. It reached $3.14 shortly after the market open. However, it lost almost all its gains after that and closed at $1.39 that day.

1.8 million shares were traded that day which is 18 times higher than its average.

What happened?

The company announced the preliminary Second Quarter 2020 Financial Results premarket on July 15th. Mogo is expecting to report:

· Revenue of $10.3 million to $10.5 million;

· Adjusted EBITDA of $4.5 million to $5.0 million; and

· Positive operating cash flow net of investing activities of $6.5 million to $7.0 million

Let us deep-dive into these numbers a bit more.

EBITDA: In Q1, Mogo reported an adjusted EBITDA of $0.5 million. Adjusted EBITDA of $4.5 million to $5.0 million would be 9 to 10 times growth.

Net Cash From Operating and Investing Activities: In Q1, Mogo reported net cash from operating and investing activities in the amount of -$4.3 million. At the time, the company guided that it would turn cash flow positive in Q2 and be in the range of $5 to $6 million for the quarter. Now, the company expects net cash from operating and investing activities to come in the range between $6.5 and $7 million. Positive cash flow is what MOGO needed as per my previous review. The company was burning cash and its levels were quite low for its debts.

Why did the stock price decline on the same day?

The answer is likely simple. There are likely 3 factors:

1. FOMO: early morning gap in price and quickly rising price resulted in flocking of buyers thinking this is going to fly. As soon as the price started to drop, they were closing positions in a panic.

2. Long-standing bag holders selling. There were likely people holding for half year or more. Their average may be well over $1 or even $2 but seeing the price of above $3 made them close the long positions that they are tired of.

3. Lower revenue and uncertainty about future growth. On February 28th MOGO formed a partnership with goeasy Ltd. (GSY.TO). goeasy acquired the MogoLiquid Portfolio for a total gross consideration of $31.9 million. The lending partnership with goeasy, Mogo members will have their loan funded by goeasy. Loan customers will continue to manage their loans through the Mogo app. Mogo will receive compensation from goeasy, while goeasy will have ownership of these loans. The partnership allows Mogo to generate additional fee-based subscription & services revenue. The sale of MOGO’s MogoLiquid Portfolio resulted in an increase in MOGO’s cash but reduced revenue. However, there seems to be more cash generated by operations on an ongoing basis through goeasy’s compensations.

The news that arrived 7 days into accelerating market crash seems to have gone largely unnoticed.

Will MOGO continue to grow?

Now that the dust settles after the crazy price action on July 15th, investors are starting to realize that MOGO has the potential to develop into the Canadian version of Square’s Cash App. Also, they seem to start to realize that with current market capitalization the company is clearly undervalued at its current revenue and EBITDA levels.

With that, the stock started to climb 3 days after July 15th with a 20% gain on July 20th. Complete Q2 2020 Financial Results to be released on August 11, 2020. All eyes are going to be at MOGO’s predictions for the following quarter. At that moment it will be clear whether the increase in EBITDA and cash flow are sustainable.

Mogo is only trading about two times projected 2021 revenues. Public fintechs like Square (NYSE:SQ), Afterpay (ASX:APT), and Shopify (SHOP) are trading at 17 to over 40 times 2021 projected revenue.

Also, Canaccord Genuity increased their price target on the stock from $3 per share to $4. Eight Capital set the price target at $5 per share.

If Mogo is indeed the Square Cash App of Canada, the stock is likely to see further tremendous growth. Personally, my first target is $6, second target - closer to $10. But I also intend to hold for at least another year if not two. I do expect the stock to hit $3 before the end of the year.

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