PSFE - Paysafe: Pivotal Q4 Earnings On Tap

2023-03-07 17:36:52 ET

Summary

• Paysafe will report Q4'22 earnings prior to the market open on March 9.
• The payments firm has a new management team in place to restructure the business, making for a volatile period.
• The stock trades at 9x EV/EBITDA, but the debt levels make the fintech more risky.

Since going public via a SPAC, Paysafe ( PSFE ) has been an ultimate disaster. The payments company has constantly failed to meet financial targets since going public and a big reverse stock split highlights the big struggles. My investment thesis remains Neutral heading into Q4'22 earnings before the market opens on March 9 and the Investor Day on March 13.

Going Nowhere Fast

Paysafe went public as a promising specialized payments firm playing the growth in online sports gambling and digital wallets. The fintech didn't ever produce the growth to make the stock appealing and recent quarterly results have reversed course with limited to no growth reported.

During Q3, Paysafe reported revenues grew 3.5% while adjusted EBITDA hit $95.5 million for a 26.1% margin. The company would've grown revenues at a 10% clip on a constant currency basis, but adjusted net income fell 26% to only $29.2 million. Also, the numbers were juiced by a couple of acquisitions.

The Q4 guidance was even less impressive with the revenue target relatively flat at $374 million with adjusted EBITDA at $107 million and a margin of ~28.5%. Again, constant currency was a major hit to revenue growth at ~650 basis points during the quarter.

The stock actually rallied on guiding for the above Q4 targets considering revenue growth of up to 1.5% exceeded analyst estimates. The payment technology company continues to mostly churn business and recently realigned business groups into Merchant Solutions and Digital Wallets. The Digital Wallets group consisting of digital wallets and eCash has vastly underperformed since going public despite domestic iGaming growing 45% during Q3.

Ultimately, the market wants to see Paysafe return to a growth mode in their specialized payments business. Unlike other SPACs, the fintech already is profitable.

The stock has limited analyst coverage promoting around 6% revenue growth over the next couple of years. Paysafe has a completely new management team and is in the process of reshuffling the sales force.

The market doesn't have a lot of expectations for the 2023 guidance and the company is highly unlikely to deliver anything impressive.

Reverse Split

A lot of beaten down SPACs have now completed reverse splits to return the trading levels back above $10. Paysafe completed the 1-for-12 reverse split effective with trading on Dec. 13 and the stock now trades above $20.

The markets correctly bought the stock dip following the reverse split as the move has no financial impact on the valuation of Paysafe. What ultimately will matter is whether the new management team can deliver a solid Q4 and provide upbeat data points for 2023.

The stock now has 61 million shares outstanding leading to a minimal market cap in the $1.2 billion range. The part that makes Paysafe less appealing than most fintechs is the high net debt levels of $2.3 billion.

The company now has an enterprise value in the $3.5 billion range with an adjusted EBITDA run rate of $400 million. Paysafe trades at ~9x EV/EBITDA targets.

If the new management team can generate 10%-plus revenue growth, the stock will turn appealing at these prices in a hurry. The market is correct to be skeptical on whether a new management team reshuffling the sales origination is able to generate momentum, at least in the short term.

Takeaway

The key investor takeaway is that investors should continue watching this restructuring from the sidelines. Paysafe has constantly disappointed the market with weak quarterly results and the company now has a new management team in place likely to set conservative guidance for the year ahead. On any signals the payments business is improving, investors can jump into the stock on the relative cheap with so few investors watching this stock anyway.

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