On paper, you can make the argument that Paysafe (NYSE:PSFE) stock is one of the better stories that evolved from the special purpose acquisition company (SPAC) phenomenon.
First, SPACs often live or die based on their sponsors. As many of my InvestorPlace colleagues pointed out, Bill Foley, who quarterbacked the reverse merger that would eventually become PSFE stock, has a long history in deal-making.
Second, the underlying business is a tremendously relevant one.
As our own Tom Kerr explained, “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.”
Of course, what really piqued investors’ interest in PSFE stock was the iGaming vertical. Primarily, consumers are hungry for various wagering activities.
Before the novel coronavirus pandemic, one of the top sectors was sports gambling. Thanks to favorable legislation in 2018 that ruled states can legalize sports betting if they wish, many states did just that, adding fuel to the iGaming movement.
Even when the coronavirus nailed us, it offered an unexpected catalyst. Pent-up demand following the suspension of sports resulted in more interest in wagering on games and competitions. Naturally, this created massive sentiment for PSFE stock early on.
Plus, you can’t ignore the potential for esports. According to industry experts, the global esports market size could hit $1.86 billion by 2026. Though it might sound nutty to older demographics, video games represent serious business as do gaming competitions. For younger millennials and Generation Z, esports is really where the action is.
PSFE stock caters to this burgeoning sector. So, why the heck are shares not performing according to fundamental implications?
PSFE Stock May Be a Harbinger for Other SPACs
In my pros and cons analysis of SPACs for Benzinga, I mentioned that one of the perhaps surprising drawbacks of blank-check firms is that they’re not necessarily the greatest performers post-merger.
According to information cited by the Wall Street Journal, SPACs “underperformed the broader market by about 3% annually in the first three years” after their initial public offering.
Why is that? Part of the reason is that SPAC sponsors receive generous compensation, usually 20% equity in the combined firm. A not-so-hidden secret about SPACs is that sponsors are incentivized to secure a deal, not necessarily a good one. Therefore, it’s important that you seek out sponsors who know what they’re doing.
Unquestionably, Bill Foley qualifies as a person who knows his stuff. Yet he’s also human and not immune to errors. Since hitting a closing peak of $19.24 on Jan. 21, PSFE stock is down below $13. That is barely above the $10 threshold where most SPACs are initially priced.
Historically, this doesn’t bode well for Paysafe. The WSJ pointed out that “Of the blank-check companies that went public in 2015 and 2016, more than half are now trading below their IPO price, the Journal’s analysis shows.”
Pouring salt on open wounds, University of Florida finance professor Jay Ritter, who analyzes IPOs, stated, “I’ve been surprised by the staying power of SPACs, given that they haven’t been producing big returns for investors.”
In the case of PSFE stock, it’s been producing losses for those that bought into its peak hysteria.
While things might turn around for Paysafe, it doesn’t seem like the company has a truly unique business. Yes, it provides tools and services for iGaming and fintech platforms, but this isn’t an unassailable market. Investors might be recognizing this and getting out while they can.
Play Safe With Paysafe
Ultimately, as many of you might be quick to point out, it doesn’t matter what I think about PSFE stock. Instead, the market is the final arbiter and it’s not presenting an encouraging message.
From early December of last year till Feb. 19 of this, PSFE stock has been trying to build positive momentum. But from Feb. 22 onward, shares have entered a bearish trend channel. It’s possible that this latest low of $12.90 is the bottom. But the thing is, it could also be a trap, leading to more pain for long-side traders.
Personally, I’d rather wait for the market to give me better signals. In the meantime, the bears are in control and you might not want to interrupt their feeding frenzy.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.