Significant Growth Expected Following Recent Acquisition for Surge Holdings (SURG); Upgraded to BUY Status.

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We are bullish on Surge Holdings Inc. (OCTQB:SURG)  as a small-cap growth opportunity in the high growth Fintech space.

From a technical standpoint, we have updated Surge Holdings to a “BUY Status, 97%”, with support holding for the last 10 trading days, with moving average lines now converging. Most significant: Today caused a 3-way (ARP) moving average convergence. This is a strong buy signal. From this, we may see a climb to our next S1 and S2 price levels. If that point is broken, then volume will simply dictate price without any significant barriers in terms of price.

However, what is catching the eyes of investors is the fundamentals, rather, the fundamentals the majority of investors have over looked.

Highlights:

  • Technology to redefine digital commerce for Underbanked marketplace through a network of neighborhood c-stores
  • Recent acquisition adding 9,800 retail locations and over $48.7 million in annualized revenues to Surge Network is a major catalyst for growth
  • Analyst Report projects over 900% upside potential for shares
  • Additional 40,000 locations contracted through national trade association
  • Expect sharp horizontal and vertical top-line revenue growth as Surge grows their network and sales per location with additional cross sell opportunities

The main gist of our thesis is while Surge shares seem to be underappreciate by the market we feel there is reason to believe that this will soon change given the recent news cycle and company performance, especially in growing top line revenues, kicking off with the completion of the ECS Prepaid Network acquisition in November 2019 notable adding over $48.7 million of top line revenues and 9,800 retail locations with significant cross-sell opportunities for other Surge products and services.  


Growth Catalyst

While the $48.7 million of top line revenue from the ECS acquisition is powerful the more significant value in our eyes is the addition of 9,800 new retail locations to the SurgePays™ Network with approximately 165 Independent Sales Organizations or ISO’s already in place that service these stores doing over 20,000 transaction a day.  Surge see’s all the data of other wireless providers to know best selling programs and maintains a competitive advantage owning the payment rails for payment acceptance of “Top-Up” wireless payments.  Its no coincidence that shortly after the ECS acquisition Surge announced a new $30 Unlimited wireless plan (Jan. 9th), then a new national sales director (Jan. 22) and soon thereafter the integration of Surge Wireless into the ECS Network (Jan 30th).

In the Jan. 30th Press, the CEO stated that he felt ECS would lead to over $50 million in additional Surge Wireless Revenues. Lets break that down to better understand what’s really needed to achieve that revenue. $50 million annualized is about $4.2 million a month in Surge Wireless revenue.  Looking only at $30 plans you would need 140,000 Surge Wireless customers.  ECS is currently processing over 20,000 transactions a day or 600,000 transactions a month.  This can be achieved in one year converting just 2% of the transactions or 1.5 customers per month in each store. Seems attainable.

In a recent interview the Surge CEO, stated that the next integration will be the SurgePays™ marketplace, where he hopes to 2x or 3x existing ECS revenues, adding another $50 to $100 million. The CEO has called this the Last Digital Frontier, redefining a distribution pipeline that has not changed significantly in decades.

Take a moment and watch a recent interview with CEO on ECS acquisition.

Summary

  • SURG shares are underappreciated because the story is unconventional.
  • Management has been stamping down on the gas pedal over the past several quarters, ramping investments in the core business and M&A, and growth is accelerating.  Strong news cycle of milestone achievements.
  • The company’s recent acquisition of ECS will add 9,800 stores to the Surge Network and allow for compounding vertical and horizontal expansion – something the market may be missing.
  • The Company has completed its development cycle and has begun to aggressively ramp revenues from both internal growth and strategic acquisitions increasing top line revenue form $15.2 million in 2018 to now over $60 million annualized with recent ECS acquisition.
  • Recently named by Deloitte Fast 500 Technology 2019 list as one of the fastest 500 growing technology companies.
  • Goldman Small Cap research reported potential of $3.25 share price or over 900% growth.
  • 2020 poised for horizontal growth as they further increase their independent retail store network and vertical growth increasing sales per store.  Key Product Indicators to track in 2020.

A major point here that adds a great deal of weight to the topline growth narrative for Surge is the company’s recently completed acquisition of ECS is not yet reflected in the Company financials.  Something to look forward in the 4th Quarter 2019 year End filings.

This acquisition represents an enormous amount of potential growth as well as some certain growth.  Trailing revenues of $4.9 million for 3rd Qrt or $19.6 million on an annualized basis are a strong foundation to build upon.

By adding  the ECS post-acquisition, the Company is potentially now trading on a forward annualized top-line of $68 million, which is 4,600% growth in two years from a base that was already well into 7 figures!

Conclusion

While there are plenty of questions still in place for Surge Holdings –  we are very happy seeing the consistent increase in top line revenues within all divisions and some recent markers of strong execution, particularly in terms of an expanding the retail network footprint as well as recently accelerating topline performance.  With shares trading near two year lows, look like significant opportunity.

Given Surge’s recent ECS acquisition and cross-sell opportunities to additional core products , continued consolidated revenue growth acceleration seems to be a solid prediction. We suspect that the hurdle of “unfamiliarity” that seems to be weighing on shares in the face of recent growth will subside over time if the company continues on its current path in proving its model.

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