Paysafe (NYSE:PSFE) stock doesn’t get the same respect as its peers, but it almost certainly was a better buy.
Often, when choosing stocks, the best choices are not the names that are getting the most press and the most shout-outs from retail investors.
Instead, under-the-radar stocks that have powerful catalysts but are widely viewed (for some reason) as having little potential are usually the most profitable picks.
I believe Paysafe is in the latter category, and I expect PSFE stock, over the medium-term and the long-term, to outperform its much-better-loved peers SoFi (NASDAQ:SOFI) and Square (NYSE:SQ).
General Motors (NYSE:GM) is one example of a little-appreciated stock that outgained one of the market’s flashiest names.
Specifically, GM stock, which few on the Street or in the media had much use for in 2020, is up 30% this year, while Tesla (NASDAQ:TSLA), most people’s darling for the last several years, has climbed just 1.3% in 2021.
Another such pair, although they’re not really in the same sector, are Apple (NASDAQ:AAPL) and Roku (NASDAQ:ROKU).
Until the last eight months or so, Apple was viewed by most institutional investors and analysts as the tech stock with the best growth outlook. Roku was seen as a risky, flash-in-the-pan name that could be ravaged by the pandemic.
In the last year, however, Apple has risen 33%, while Roku has soared over 150%.
A Closer Look at PSFE Stock
SoFi has gotten a great deal of press and “Reddit time,” but its app and offerings do not seem much different from those of the large American banks. What’s more, most of SoFi’s revenue is derived from traditional banking, not technology.
On the other hand, Paysafe is very well-entrenched in a few, fast-growing, fintech markets that aren’t already crowded with gigantic companies, making it differentiated and giving it first-mover advantages.
Paysafe is a leader in digital wallets, online cash and integrated processing. Among other uses, digital wallets are used by consumers to make payments on iGaming and trading websites.
During Paysafe’s Analyst Day in March, CEO Philip McHugh said that its digital wallets are used in hundreds of markets accepting multiple payment methods. The company’s digital wallets already had 3.5 million active customers as of March.
As I noted in my last column on PSFE stock, online gambling (aka, iGaming) is poised to boom in the U.S. Meanwhile, trading stocks also became a much bigger business here during the pandemic.
Although I know very little about European online gambling and stock trading, the same phenomena may be occurring in that continent, where PaySafe also has a meaningful presence.
In the first quarter, Paysafe’s digital wallet business generated sales of nearly $95 million.
On the online cash front, Paysafe allows consumers to use physical currency, instead of cards, to buy products and services online. That is, using its technology, consumers can go to a store, hand over cash, and then have access to those funds online.
This offering will be very useful to the hundreds of millions of people in the world who can get online with mobile devices but do not have access to good banking services.
Indeed, the business, which Paysafe refers to as eCash Solutions, generated sales of $113 million last quarter and had 13 million active users as of March.
The integrated processing unit serves small and medium-sized businesses and thousands of e-commerce companies, according to McHugh. Among the sectors in which the division specializes are iGaming and direct marketing.
Paysafe’s sole interface can utilize “hundreds” of payment methods, including its own unique payment methods. Over time, this business should benefit tremendously from the rapid growth of both e-commerce and iGaming.
The unit generated $179 million of sales last quarter.
Paysafe Is Cash-Flow Positive
Many pundits and retail investors, looking at Paysafe’s negative bottom line, may think that the company is unprofitable. But for tax purposes, companies often have an incentive to lower their net incomes, by using non-cash items like depreciation and amortization to the greatest extent possible and by paying interest on loans.
So cash flow from operations and operating income frequently are better indications of a company’s actual profitability than net income or earnings per share (the latter figure can also be artificially inflated by share buybacks, but that’s another story.)
Operating income excludes interest costs, while cash flow from operations excludes depreciation and amortization.
In 2020, Paysafe’s operating income was nearly $150 million, while its cash flow from operations was an impressive $409 million. In Q1, its cash from operations came in at $48.7 million, while its operating income was -$34.6 million. But excluding depreciation and amortization, its OI was nearly $41 million.
PSFE stock is trading at just 18.6 times its 2020 cash flow from operations. That’s not a very high valuation for a pioneering tech company in rapidly growing sectors that has important first-mover advantages.
SQ stock, on the other hand, is changing hands for 330 times its 2020 cash flow and probably can’t be acquired because of its huge valuation ( its market capitalization is about $127 billion, versus Paysafe’s $7.6 billion.)
The Bottom Line on PSFE Stock
There’s not much buzz around Paysafe, but it has a huge amount of potential and it’s trading at a low valuation.
Those types of stocks usually are the best ones to buy, so I recommend that investors purchase PSFE stock.
On the date of publication, Larry Ramer held long positions in GM and ROKU. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.