In Focus: Paysafe, Discount or Disaster?
Paysafe ($PSFE) recently announced its Q3 2021 results, and it was not to the liking of the investing public. After the release of the company's earnings Paysafe's stock declined by more than 40%, ouch. It seemed like the selloff of the stock got more headlines than the earnings call did, and that’s likely due to Reddit and WallStBets.
After GameStop’s ($GME) epic run earlier in the year, people have been scanning WallStBets and Reddit for the next GameStop. Though there wasn’t a massive short position like the one that existed in GameStop, Paysafe had been pinned as an undervalued gem by the Reddit crowd, which gave those hoping to be a part of the next GameStop a reason to buy and hold Paysafe. For the meme stock crowd, and others, this was going to be the earnings report that made big Wall Street firms pay attention to Paysafe and run the stock price up. Narrator voice, the earnings call did not get big Wall Street’s attention, and the stock price did not run up. Not only did Paysafe miss revenue expectations in the quarter, the company revised revenue guidance downward.
Paysafe generates revenue through three different divisions within the company which are integrated solutions, digital wallets, and eCash solutions. In Q2 2021, revenue from integrated solutions and digital wallets grew from Q1 2021, with only eCash failing to grow quarter-over-quarter. In Q3, revenue declined quarter-over-quarter in all three divisions. The earnings report for Q3 2021 was the official stamp that 2021 won’t be Paysafe’s year.
After doing my own research on the company earlier in the year - not that I don’t trust the great minds found on Reddit, I just like to check things out for myself - I found the company to be fairly priced at around $11 to $13 per share, so I never purchased a share. Now at $4.50, the stock is looking like a blue light special.
In my initial review there were some things that I took issue with, first and foremost it wasn’t a profitable company. I try to steer clear of those on most occasions. Also, the company is a part of the fast growing fintech space, yet in 2020 revenue only grew by less than 1%, which doesn’t scream high-growth stock. But there were some things to like about the company, like its positive free cash flow, which it was able to produce in 2019 and 2020. In addition, the company was labeled a leader in iGaming payment services.
Know What You Own, Know Why You Own It.
Even after the 40% drop in the stock price, there are two reasons why I could see myself owning Paysafe. The first is iGaming. Paysafe reported a 50% year-to-date revenue increase from iGaming in North America during Q3 2021. Zack Jones’ Forbes article does a great job of explaining the rise of iGaming. Jones notes “iGaming is a highly innovative industry that never sleeps, and the online casino sector is leading the way. Online slots are coming out every week and gather a massive public following.”
During the quarter the company announced its acquisition of PagoEfectivo, an alternative payment platform used in Peru and Ecuador that has gained popularity with merchants operating in iGaming and digital goods.
The iGaming payment solution has been tried and tested in Europe, which should make expansion in the U.S. and South America an easy road assuming Paysafe can secure the partnerships.
The second reason why I’d make a Paysafe investment at these levels is neobanking. The acquisition of German fintech firm viafintech during the quarter helps strengthen Paysafe's presence in neobanking.
The Wikipedia definition - linked above - is a bit narrow. I see neobanking as more than digital banks. When I think of neobanking I see Walmart offering checking and savings accounts to Walmart customers. I envision companies like PayPal, Coinbase, and Robinhood offering car loans and home loans. I see the evolution of banking with neobanking, where traditional banking functions are offered by companies that aren’t traditional banks.
Insider Intelligence reports that the U.S. has one of the highest number of digital-only bank account holders with 23 million, and that number is expected to grow to 47.5 million by 2024.
I’m old enough to remember Netbank, a neobank that sprung up during the Dotcom boom, but people didn’t call it a neobank back then. Netbank had a good run, but was eventually acquired by ING in 2007. When it was acquired, Netbank had over 100,000 customers and $1.4 billion in deposits, which isn't a lot. JP Morgan Chase ($JPM) ended 2007 with over $740 billion in deposits. Netbank, like many companies that popped up during the dotcom boom, was just a little ahead of its time. Today, most of us do our banking through an app, which has allowed neobanking 2.0 to feel less drastic and more like regular banking.
Swimming in the Right Waters
Paysafe’s bounce back will depend on the execution of the company’s management team, obviously. The company is swimming in the right waters, and could see the stock price increase as the tide of the industries they work in rise, but the Reddit community wants more, they want a millionaire maker. Paysafe’s CEO Philip McHugh has decades of experience in banking and finance, so the man knows the finance industry, the question is can he execute the company’s vision in this new financial environment we find ourselves in?
I don’t know if Paysafe can be a 10 bagger, but I think it can get back to where it used to trade which is $11 to $13 per share just off of iGaming and neobanking.