Digital commerce solutions provider Paysafe Limited (PSFE) went public through a reverse merger with Foley Trasimene Acquisition Corp. II on March 31. The company was valued at $9 billion at the time of the merger due to its diversified operations in the domestic gaming market and brick & mortar businesses. It currently has a $10.58 billion enterprise value.

While most SPAC deals over the past year witnessed substantial investor interest, PSFE failed to generate hype. Its shares have declined 12.4% since its stock market debut and 10.2% over the past month.

Here’s what we think could shape PSFE’s performance in the near term:

Recent Financial Results and Balance Sheet Performance

PSFE’s revenues increased 5% year-over-year to $377.40 million in the first quarter ended March 31. This can be attributed to a 63% rise in revenues from its eCash segment, which offset declining revenues from its digital wallet and integrated processing segments. Also, the company’s divested businesses over the past year had a 2% negative impact on its  revenues.

Despite a modest increase in revenues, PSFE’s gross profit declined 1.7% from its  year-ago value to $226.40 million. Its adjusted EBITDA increased marginally from the same period last year to $113.20 million. However, its total adjusted EBITDA margin declined 140 basis points from the prior quarter to 30%, and its net loss was  $49.10 million over this period.

Balance Sheet

Over the last couple of months, PSFE has been taking  steps to reduce its debt burden, which includes  its repayment of $1.20 billion outstanding debt. However, its  interest expense increased 53% year-over-year to $58.50 million in the first quarter, owing to capitalized debt fees resulting from  its debt repayment on March 31. PSFE’s free cash flow increased 28.6% year-over-year to $108.50 million. This  rise can be attributed to a $45 million benefit from the utilization of bank guarantees, however. PSFE’s share-based compensation expense stood at $72.40 million, indicating a dilution of its equity.

On June 10, the company priced a secured, senior notes offering to raise $931 million. The company plans to use the proceeds to refinance existing indebtedness and extend its maturity profile. The notes are  guaranteed by PSFE’s indirect subsidiary Paysafe Group Holdings II Limited, which has a corporate family rating of B1 and stable outlook from Moody’s (as of April 1). However, the offering to extend its  debt maturity profile contradicts the company’s past efforts to reduce its debt burden.

Premium Valuation

In terms of forward P/E, PSFE is currently trading at 320.80x, 890.6% higher than the 32.39x industry average. Its forward EV/Sales and EV/EBIT multiples of 6.98 and 63.24, respectively, are significantly higher than the 4.27 and 21.04 industry averages.

Also, PSFE is currently trading at 5.65 times its forward Sales estimates, 38.9% higher than the industry average. Its forward Price/Sales ratio is 443.3% higher than its 1.04  trailing-12-month multiple .

Consensus Rating and Price Target Indicate Potential Upside

All  six Wall Street analysts that rated PSFE have rated it Buy. The stock has a  $17.67 median price target, indicating a potential 49.4% upside. The price targets range from a low of $16 to a high of $19.

POWR Ratings Reflect Uncertainty

PSFE has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a C grade for Quality and Stability. Its 61.47% trailing-12-month gross profit margin is 26.7% higher than the 48.52% industry average. However, its ROE is negative 6.37%. Such mixed profitability metrics justify its Quality grade. PSFE’s slightly high 1.20 beta  is in sync with the Stability grade.

Of 51 stocks in the B-rated Consumer Financial Services industry, PSFE is ranked #41.

Beyond what we’ve stated above, we have also rated PSFE for Sentiment, Growth, Value and Momentum. Get all PSFE Ratings here.

View the top-rated stocks in the Consumer Financial Services industry here.

Bottom Line

The world  is increasingly going cashless and  digital payments are becoming the norm. In fact, the COVID-19 pandemic has accelerated the digitization of the payments industry by two or three years. With major economies working toward launching their own  digital currencies, the use of cash is declining in  Western nations. As this trend gradually spreads in the emerging markets, precipitated by China’s digital yuan launch, we think online commerce payments platform PSFE has immense growth potential. However, investors should wait until the company reports relatively stable financials before investing in the stock.

PSFE shares were trading at $11.93 per share on Friday morning, up $0.10 (+0.85%). Year-to-date, PSFE has declined -20.99%, versus a 13.60% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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