Rising Regulatory Pressure And Fintech Rivalry Will Erode Profitability

Key Takeaways

• Regulatory pressures, big tech competition, and fintech disruption threaten Nexi's margins by increasing costs and eroding market share and pricing power.
  
• Dependence on acquisitions risks operational inefficiencies and limits expected cost savings, further constraining long-term profitability and growth prospects.
  
• Strong operational execution, strategic contract renewals, and secular growth tailwinds support Nexi's stable profitability, enhanced cash flow, and growing shareholder returns.

Catalysts

Provides electronic money and payment services to banks, small and medium-sized enterprises, large international corporations, institutions, and public administrations in Italy, Nordics and Baltics, Germany, Austria, Switzerland, Poland, Southeast Europe, and internationally.

• Intensifying regulatory scrutiny and evolving EU data privacy laws are likely to increase Nexi's compliance costs and constrain its ability to leverage customer data for product and service innovation, leading to slower top-line growth and compressed net margins over time.
  
• The rapid expansion of big tech firms and super-apps into the payment space threatens to disintermediate Nexi from consumers and merchants, potentially causing long-term erosion of transaction volumes, shrinking the addressable market, and exerting downward pressure on revenues.
  
• Growing merchant and consumer demand for instant, near-feeless payment solutions could undermine Nexi's ability to maintain pricing power, driving a sustained decline in fee rates and resulting in lower net margins and profitability despite stable transaction growth.
  
• Nexi's reliance on inorganic expansion through M&A risks escalating operational complexity and integration issues, which may prevent anticipated synergies from materializing, ultimately impairing operating leverage, inflating costs, and limiting margin expansion.
  
• The emergence of decentralized finance (DeFi), blockchain-based payment infrastructure, and increased price competition from fintech disruptors and large merchants pose a structural threat to Nexi's business model, potentially resulting in permanent net margin compression and stunted long-term earnings growth.

Nexi Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nexi compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nexi's revenue will decrease by 17.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 16.8% in 3 years time.
• The bearish analysts expect earnings to reach €598.5 million (and earnings per share of €0.48) by about August 2028, up from €304.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 21.7x today. This future PE is greater than the current PE for the IT Diversified Financial industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 2.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.75%, as per the Simply Wall St company report.

Nexi Future Earnings Per Share Growth

Risks

• Nexi's consistent profitable growth, strong cash generation, and expansion of EBITDA margins signal operational excellence and improving underlying earnings, which could drive higher share prices if sustained.
  
• The company's successful renewal of all major banking contracts in Italy, including an extension with Credit Agricole through 2029, demonstrates resilience in its core market, reducing revenue volatility and supporting net income stability.
  
• The ongoing shift from cash to digital payments, robust e-commerce growth, and Nexi's strong position in the Nordics and Germany mean that long-term secular tailwinds may continue to drive transaction volumes and revenue up.
  
• Nexi's disciplined cost management, integration synergies from prior M&A, and focus on reducing CapEx intensity are improving free cash flow generation, which supports both shareholder returns and investment-grade credit ratings.
  
• High levels of cash returned to shareholders via dividends and buybacks, alongside a clear dividend growth commitment, could increase investor confidence and result in upward share price pressure if operational performance remains strong.

Valuation

• The assumed bearish price target for Nexi is €4.1, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nexi's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €8.75, and the most bearish reporting a price target of just €4.1.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €3.6 billion, earnings will come to €598.5 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 13.8%.
  
• Given the current share price of €5.39, the bearish analyst price target of €4.1 is 31.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.