The SPAC (special purpose acquisition company) craze of 2020 and 2021 may go down in the history books as one of the most speculative market situations in stock market history. 2021 has seen $166 billion in SPAC-led deals so far, more than double 2020’s SPACs issuance of $73 billion. There have been winners and losers in the SPAC craze, but one strong company to come out of the movement is Paysafe (NYSE:PSFE). Let’s take a closer look at the SPAC frenzy of the past year and where PSFE stock stands today.
There is some justification for all of the SPAC craziness, as interest rates are so low and stock prices are very high, so investors need to speculate on these blind pools in order to generate strong returns. “Here, take my money; I trust you’ll do something great with it. Even though I haven’t met you, and most of you don’t have any track record of investment or business success.” These types of propositions only happen in raging bull markets, or more specifically near the tops of bull markets.
The track record of SPACs post-merger/acquisition is far from perfect, and these stocks often decline substantially after an initial hyped run-up. For example, look up the history of Waitr Holdings (NASDAQ:WTRH). Or Nikola (NASDQ:NKLA) might be a good example, particularly for those shareholders who didn’t get out at $65 (or $55, or $45, or $35, etc).
Not All Is Lost in the SPAC Market
However, what if you do find a SPAC that actually merged with an established company and is supported by a fabulously successful investor and business operator?
The SPAC in this example, although technically no longer a SPAC, is Paysafe. And the person is none other than Bill Foley, who has an admirable track record of business success. Companies associated with Foley include such diverse names as Fidelity National Financial (NYSE:FNF), Foley Wines, Ceridian (NYSE:CDAY) and the Vegas Golden Knights. Plus, and perhaps more importantly, he owns one of the great ski resorts in North America — Whitefish Mountain Resort in Montana.
Foley’s SPAC was called Foley Trasimene Acquisition Corp. II, and it raised $1.3 billion in 2020 before merging with Paysafe on March 30, 2021.
At Least Paysafe Has a History
PSFE is a 20-year-old company with 3,400 employees and over $1.5 billion in revenues. Paysafe is a specialized payments company focusing in three areas: 1) digital currency solutions for iGaming platforms, 2) stored value digital wallets and 3) POS and eCommerce solutions.
Online payments make up 75% of revenues. The total addressable market for these types of payments is estimated to be $58 trillion accompanied by double-digit growth rates. The company was public before but went private in 2017 with help from Blackstone and CVC Partners.
Paysafe can be considered a classic pick-and-shovel investment play. They provide the tools that drive online gaming and e-commerce without having to worry about producing a final product. Paysafe can be the arms provider for such verticals as iGaming, travel, digital goods (think Fortnite), FinTech services and traditional integrated payments. This provides a diverse set of revenues streams that can offset any lumpiness in various end markets.
Additionally, the company is spread out globally with 47% of revenue coming from North America, 39% from Europe and 14% from other countries.
What Is the Upside for PSFE Stock?
The company expects to generate about $1.5 billion in revenues in 2021 with a three-year goal of reaching $1.88 billion by 2023. EBITDA (earnings before interest, taxes, depreciation and amortization) guidance is $490 million this year with expectations of reaching $660 million by 2023. No earnings-per-share (EPS) or net profitability guidance has been provided by the company at this time.
Due to the high share count dilution after the transaction closed, the market capitalization currently stands at about $10 billion. I estimate EV/EBITDA is about 22x for 2021 and 15x for 2023. A $10 billion market cap seems high for the type of growth rates that are expected and the EBITDA that is being generated.
One can make a relative value case and compare PSFE stock to Paypal (NASDAQ:PYPL) with a 48x EV/EBITDA ratio or Square (NYSE:SQ) with an insane 322x ratio, but the math still has to work out for PSFE.
The company went private in a $3.7 billion deal in 2017 when the company had about $1 billion in revenues. Now revenues are 50% higher, but they’re asking us to buy in at a price 300% higher than the private deal.
It appears the upside on PSFE stock may be limited until the company grows into its excessive enterprise value.
On the date of publication Tom Kerr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Kerr, CFA is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.