Wireless Provider Turns Emerging Fintech Platform; Initiating Coverage of SurgePays
We are initiating coverage of SurgePays (SURG), a forward-looking financial technology and telecommunications firm dedicated to serving the underbanked. Its wireless subsidiaries provide mobile broadband, voice, and SMS services to subsidized and direct retail prepaid customers primarily through the US Federal Affordable Connectivity Program (ACP). SURG has built a profitable business in the ACP segment of the wireless market. Through its two wireless brands, SurgePhone and Torch Wireless, SurgePays has amassed a subscriber base of more than 250,000 customers in just a few short years. This has driven ~$100 million in high-margin, recurring revenue. This has also had a significant impact on SurgePays’ profitability and balance sheet. Surge Fintech represents the strategic future of the company. With the financial success of its wireless business, management is looking to reinvest in its fintech platform across the +150,000 convenience stores/bodegas currently operating in the US. Any success here could have a disproportionate impact on the company. Shuttering of LogicsIQ is a rational capital allocation decision. Although LogicsIQ has historically contributed meaningfully to revenue and profitability, its results have become much less relevant with its success in the ACP market. Funding/expansion of the ACP represents the largest risk. The ongoing political battle in the US Congress has played havoc with the overall federal budget but casts an even greater degree of uncertainty for Biden-sponsored spending programs like the ACP. While there is risk to the ACP, extended funding of the program over the next 12 months could have a significant impact on SurgePays. Trading at ~3x 2024 consensus EPS of $1.91, SurgePays trades at a significant discount to its wireless service provider peers as well as the broader market at roughly 17-18x EPS. It is important to note that consensus does not appear to fully reflect the financial impact of the recent share offering. Management has proven to be nimble, disciplined, and clearly aligned with shareholders. Although SurgePays has witnessed some dramatic shifts over the years, management hit a clear home run with its efforts in the ACP market. While it remains to be seen if it can leverage this position into its more predictable fintech model with the CEO owning nearly 40% of the outstanding shares, it would seem leadership has an incentive to do what’s right for all stakeholders.
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