Paysafe (NYSE:PSFE) reported on Nov. 11 that revenue for the third quarter fell 1% from last year. Moreover, the company’s adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) fell 1% as well. This does not bode well for PSFE stock.
But, as you may surmise, the stock has already dropped quite a bit. For example, for the past year, PSFE stock is now down from $10.36 on Nov. 23, 2020 to a close of $3.98 on Nov. 22, 2021. That represents a tumble of around 62% over the period.
So, PSFE is down significantly for the past year or so. But most of this drop has actually occurred in the past three months. Over that period, the stock has dropped some 53%.
Here’s what investors should know about Paysafe and its shares moving forward.
PSFE Stock: Q3 Earnings and Outlook Disappoint
No doubt, this company’s Q3 earnings were disappointing. Although its total payment volume increased by 19% to $31.1 billion, its revenue fell 1% year-over-year (YOY) to $353.6 million.
However, probably more impactful on PSFE stock was the company’s lowered outlook for 2021. Last quarter, Paysafe reaffirmed its 2021 guidance. That was for sales to reach between $1.53 billion and $1.55 billion, or $1.54 billion at the midpoint. But on Nov. 11, Paysafe lowered its full-year guidance to sales between $1.47 billion to $1.48 billion, or $1.475 billion at the midpoint. That represents a nearly 5% decline in forecast sales for 2021.
Of course, no one buying a stock (or analyzing it) wants to see the company admit it expects a 4%-plus decline in sales from prior estimates. That’s like admitting that people are not as excited about your product — in this case, payment services — as they were before.
There is nothing that seems to be causing this lowered expectation other than lower demand. It’s not as if the company expects to shut down for a week during Q4, or something else like what occurred during the pandemic.
This has also meant that analysts lowered their forecasts for Paysafe going forward. For example, Seeking Alpha’s survey of nine analysts estimates sales of just $1.54 billion in 2022, only slightly higher than the forecast of $1.47 billion for 2021. That is not exactly a high-growth scenario.
Where This Leaves Paysafe
Paysafe believes that higher gambling regulations (as it makes most of its revenue from online gambling sites) is a major cause for its lower revenue. In addition, the company blames “softness in key European markets and performance challenges impacting the Digital Wallet segment.”
In fact, during the Q3 conference call with analysts, management talked about “softness” several different times. Here is a typical example:
“Finally, we had an expectation that digital wallets would see a soft third quarter followed by improvements in Q4 […] And we see this continuing into the fourth quarter, driven by market softness and performance challenges that are being addressed.“
What management is really saying here is that people are not gambling as much, at least in Europe, or buying cryptos with Paysafe’s digital wallet solutions.
This is strange to me. Crypto trading is soaring right now and so is online gaming and gambling. Yet, for some reason, Paysafe is not at the party. They need to get their act together. Something is stopping its direct-to-consumer products from selling. The company says it is addressing the issue. Let’s hope for PSFE stock investors’ sake that they can figure it out.
What to Do with PSFE Stock
Despite all this negativity, though, the good news is that PSFE stock is now cheap. Given its $2.8 billion market capitalization, the stock is trading for less than 2 times its 2021 revenue estimate. For 2022, it’s trading at just 1.87 times sales, according to Seeking Alpha estimates.
Moreover, analysts now expect earnings per share (EPS) of 19 cents for the year ending 2023. That puts PSFE stock at nearly 21 times forward earnings (the Nov. 22 close price of $3.98 / $0.19 EPS).
However, that is not necessarily very cheap, especially given that the company assumes profitability two years in the future. Therefore, most value investors — although they love a falling stock price — might be tempted to wait longer here.
Typically, these investors want to wait for a clear bargain from an asset-based situation. Paysafe does not yet have this. The cash balance of $262.3 million is well below its long-term debt, even when including the restricted cash of $1.2 billion.
This means value investors will likely abstain from PSFE stock until the company is close to turning a profit. And that could be a good while from now.
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On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
