S&P/ASX 200 Index (ASX: XJO) payments solutions provider EML Payments Limited (ASX: EML) has had a horror run recently. After surging to a new 52-week high of $5.70 on 17 February, EML Payments shares were hammered in the coronavirus-induced panic selling that gripped global equity markets throughout most of March.
In just over a month, the EML share price collapsed by a whopping 79% to just $1.20. It has posted a modest recovery since, but is still trading at $2.23 as at the time of writing.
EML was one of the most successful growth stocks of 2019, skyrocketing 200% higher after it beat its own earnings guidance for FY19. And FY20 was already shaping up to be another bumper year for the company. Revenues for the half year ended 31 December 2019 were up 25% against the prior comparative period to a little over $59 million, while net profit after tax and amortisation soared 70% to $16 million. EML was on a strong growth trajectory and had made a number of strategic, revenue accretive acquisitions designed to shore up its market position.
But then coronavirus happened. And unfortunately for EML, it is particularly exposed to the global economic downturn caused by the pandemic.
Broadly speaking, EML operates in the 3 key segments: branded gift cards, general purpose reloadable cards (notably for bookmakers like Ladbrokes and BetEasy), and virtual account numbers that facilitate transactions between businesses and their suppliers.
As you can probably understand, all 3 of these segments would be adversely affected by the restrictions imposed by most governments across the world. Retail trading is down as a result of declining consumer sentiment caused by ballooning unemployment rates, the online gaming industry is suffering due to the cancellation of most major sporting events, and companies are doing less non-essential business as they strive to cut costs.
EML acknowledged these impacts on its business when it released a COVID-19 update back in March. While the company claimed that it had been delivering at the upper end of its performance targets for the first 8 months of FY20, it was forced to suspend its full year guidance in light of the worsening economic situation caused by the pandemic.
There is some light at the end of the tunnel though. EML claims to be continuing to sign new contracts, it has a strong balance sheet, and it does a significant amount of business offshore, meaning it will benefit from the devaluation of the Australian dollar.
Foolish takeaway
While EML has been forced to take a pretty substantial hit in the short-term, there are still plenty of reasons to be hopeful about its prospects for the future. Up until the coronavirus hit, the business had been expanding rapidly, and EML has now reached a point where it has significant enough cash reserves to potentially see it through an economic contraction.
The impacts of the coronavirus pandemic definitely make EML a significantly riskier investment than it was a few months ago. It is most likely that EML's revenues will be hurt materially for the remainder of FY20, and the road back to growth could be a long one. However, investing should be for the long-term, and at current prices EML offers significant upside for those investors willing to take on the risk.
