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Tyro (ASX:TYR) share price tumbles 12% on short report – are shares cheap?

Shares in financial technology company Tyro Payments Ltd (ASX: TYR) have fallen nearly 12% today and are now in a trading halt pending an upcoming announcement.

From its peak of around $4 per share in November last year, the Tyro share price has since dropped more than 40% to its current level of $2.32 per share at the time of writing.

Tyro provides payment solutions and business banking products to merchants throughout Australia and processes transactions through its EFTPOS terminals.

What’s happened recently

Tyro’s first announcement on 7 January revealed that a terminal connectivity issue was affecting ~15% of its terminal fleet with an expected reduction in transaction volumes of just 5%.

In its most recent update this week, the company advised that the number of merchants affected was closer to 30%.

While it appears that Tyro is making an effort to resolve the problem, it’s too little, too late for many small business customers who have been left outraged at the extended downtime and lack of quality customer service. It appears many customers have switched to other merchant banking providers and Tyro is now facing potential legal action as a result of the outages.

Short-seller kicks the boot in

The Tyro share price has come under additional pressure today after the company was targeted by short-seller Viceroy Research, which claims that half of Tyro’s terminal fleet has been affected:

“Viceroy’s extensive channel checks at locations across Australia indicate the number of bricked terminals is closer to ~50%, much larger than reported by Tyro.”

Featured video: Interview with Viceroy Research’s Gabe Bernarde

What’s more, Viceroy claims that many customers with broken terminals had received no communications from Tyro until prompted.

Viceroy believes that Tyro offers a “limited-risk short as customers churn in record numbers to vastly superior, non-archaic payment solutions providers, which are available in abundance, and immediately.”

Tyro made a net loss of $38 million in FY20, and Viceroy believes that this recent increase in customer churn will delay the breakeven point with no clear catalysts for a jump to profitability.

According to notes out of Viceroy’s report, due to the outdated technology and recent connectivity issues, many of Tyro’s customers have already switched providers. Even when the issue is resolved, there is likely going to be significant and long-lasting reputational and financial fallout as a consequence.

Now what?

This is clearly an incredibly tough space to be in as a business. As evidenced by this most recent outage, many customers are willing to switch providers after just one bad experience.

As pointed out by Viceroy, this incident will likely delay a breakeven point and will require the company to continue using customer deposits to fund operating cash flows.

Shares in Tyro may look cheap to where they were a few months ago, but it’s still hard to get a rough sense of valuation in my eyes.

I’d be sitting on the sidelines for now and waiting to see how the issue is resolved before I’d think about buying shares in Tyro.

In the meantime, if you’re after share ideas, check out this article: 3 ASX growth shares I’d buy for 2021.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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