When I last wrote about Paysafe (NYSE:PSFE) in April of this year, I was skeptical of the SPAC craziness in the general sense of bringing young, pre-profit companies to the market. However the SPAC acquisition that led to PSFE stock stood out from the crowd of speculation.
Paysafe is an established business with a 20 year history, 3,400 employees, and $1.5 billion in revenues. Even better, the lead sponsor or supporter of Paysafe was legendary businessman and investor Bill Foley.
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. Perhaps that last fact is an example of cognitive bias as I am a ski patroller at a ski area in Montana (not Whitefish).
Things have changed since my last PSFE stock article. But first, let’s refresh our minds on what Paysafe is.
PSFE Stock and a Few Risks
Paysafe can be considered a classic pic-and-shovel investment play in the Fintech world. 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. The company has a diverse global reach too, with 47% of revenues coming from North America, 39% from Europe, and 14% from everywhere else.
Investors were disappointed with several items in their Q2 2021 earnings release. Revenue guidance for Q3 was below expectations, however full-year guidance was unchanged.
Another issue was the announcement of two major acquisitions. Although these are expected to be successful, value-added companies, the combined cost was approximately $1 billion and will take the leverage ratio to over 5x, which some feel is too high. This most likely contributed to PSFE stock’s significant retreat in August.
Recent Acquisitions May Add Value
Acquiring tuck-in companies has been an important strategy for PSFE over the years. As I stated above, the company made two big acquisitions. On Aug. 16, the company announced they were acquiring SafetyPay for $441 million. SafetyPay is a Latin American e-commerce platform with operations in 11 countries and claims to have 180,000 collection points.
On Aug. 22, Paysafe announced they were acquiring viatech. Viatech is a German based fintech company with leading positions in the digital banking world.
Paysafe’s ambitious global expansion goals are well solidified with these types of acquisitions.
Debt and Q2 Update
PSFE reported strong results in Q2. Total payment volume (TPV) increased 41% to $32.3 billion while revenues increased 13%.
The eCash segment was the strongest performer with revenues up 37%.
Adjusted EBITDA increased 8%, but EBITDA margins fell 1.5% to 30.9% due to unfavorable business mix and headwinds from high margin vertical. Also, last years EBITDA margin benefited from temporary costs reductions as a result of the Covid-10 pandemic. For the 2021 calendar year, EBITDA is expected to grow at a double-digit rate.
Total debt at the end of the quarter was $2.1 billion and unrestricted cash stood at $248 million. Based on trailing 4-quarter EBITDA, the company’s leverage ratio was 4.3x. Most of the debt was refinanced after the SPAC transaction with maturities being extended to 2028/2029 from 2024 and as rates were lowed by 50bp.
Paysafe’s long-term leverage ratio goal is 3.5x. The company’s high margin recurring revenue business model should generate strong free cash that will be able to support that level of debt.
Valuation Has Improved Since July
Paysafe didn’t change its 2021 guidance and the core business premise didn’t change. If anything, recent acquisitions will increase their addressable market and provide new avenues of double-digit growth. So therefore I didn’t change my value for the company. I still think its worth $12-$13 based on what we know now.
I was hesitant when the stock was trading around $12. With PSFE stock trading close to $8, that makes PSFE a strong buy at these levels.
I can’t comment on short-term trading moves. But for the long-term from these levels, Paysafe has the right product set and management team to make this a compounder.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.