Known for its digital wallets and e-money solutions, Paysafe (NYSE:PSFE) provides digital payment solutions to a wide variety of customers. The company recently went public via a special-purpose acquisition company (SPAC) late last year and has been one of the main cautionary tales for new investors. After hitting a high of $19.40 during the height of SPAC mania, the value of PSFE stock has evaporated. In fact, the stock is now trading at a price of $3.89. That’s a loss of nearly 80%.
Let’s examine the cause of this decline and see if there are opportunities in Paysafe at these price levels.
Paysafe’s Digital Wallet Runs Into Issues
Paysafe recently reported its Q3 2021 earnings and the results have disappointed investors. Year-over-year, total payment volume increased by 19% to $31.1 billion. However, this translated to a drop in revenue of 1% from $355.5 million to $353.6 million. The disappointing revenue performance was largely due to the business divestiture of Pay Later.
Excluding the divested business, revenue wasn’t still particularly impressive. Growth for most of the company’s business was approximately 5% YOY. Integrated eCommerce and eCash showed strong growth. Unfortunately, this was all offset by a decline in the Digital Wallet business.
Paysafe’s Digital Wallet business dropped a whopping 15% YOY in Q3 2021. Revenue for the segment was $83.6 million compared to $98.5 million a year prior. The segment’s volume suffered a similar decline of 17% from $4.8 billion to $4 billion. However, the company’s take rates remain unchanged, indicating stable margins. Considering Digital Wallets was looked at as a fast-growing portion of the business, this poor performance is a little concerning.
The company was initially targeting double-digit growth for the Digital Wallet business. But given the recent challenges, Paysafe management has indicated that it should take another year just to get this business back on track. Digital Wallets are facing both external and internal headwinds in the company’s largest market. On the external side, Paysafe’s solution is being challenged by real-time banking or open banking network initiatives. Regulation in Europe has also been tightening. Particularly in Germany, which is the largest market.
Internally, Paysafe is taking action to put this business back on the growth track. The company is planning to make improvements to the user experience, reduce prices and remove poorly performing product features. It remains to be seen whether management will be successful with these initiatives
PSFE Stock Is Selling at a Discount
As mentioned in my previous article, PSFE stock could be undervalued. This is especially true now after the massive post-earnings drop. In Q3 2021, the company generated adjusted EBITDA of $106 million, hitting the upper end of its guidance. While the Q3 2021 EBITDA was lower than Q2 2021’s, it was still a respectable number and fell within management’s guidance.
The company generated a free cash flow of $70.2 million this quarter. This represented a 19% increase compared to the free cash flow of $58.8 million from Q3 2020.
Due to the underperformance, Paysafe has revised their guidance lower. The company is now guiding for an adjusted EBITDA in the range of $425 million to $435 million. This is much lower than the $480 million to $495 million prior guidance.
The selling on PSFE stock was much more aggressive than the revised guidance warranted though. The company is now trading at a market cap of $2.85 billion. This implies an EBITDA multiple of 6.7x. Paysafe is trading at quite a substantial discount.
However, despite the discount, I am not entirely convinced that the stock can’t sink lower.
A reduction in revenue growth is usually the death knell for high-growth stocks. It remains to be seen if Paysafe can turnaround its digital wallets business. For now, I may just keep PSFE stock on my watchlist.
On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.