The old maxim “never judge a book by its cover” is on full display when it comes to Paysafe (NYSE:PSFE). Sure, the “safe” in the corporate name of PSFE stock has to do with the nature of its payment processing business, rather than being in reference to the stock itself.
Yet over the past year, with its nearly 80% drop in price, there has been little security for those holding it since its public debut. Many of these investors have likely cashed out, and moved on. But I’m sure some of them are still holding it, in the hopes it rides out its recent rough patch, and makes a move back toward past price levels.
Unfortunately, the chances of this happening do not look good.
The key issue with this company continues to be an issue. That is, as its legacy European payments business continues to decline, this will counter any sort of high growth from its budding U.S. gaming payments segment. Management and other insiders were able to paper over this issue during 2021, when it went public via a special purpose acquisition company (SPAC) merger.
Now? After getting hoodwinked once, the market won’t be fooled again. Many, including recently several high-profile investment managers, have thrown in the towel on it. If you own Paysafe, it’s time that you do the same as well.
PSFE Stock Remains a Bad Bet
At first glance, it may appear as if this stock’s big drop over the past year was an overreaction. After all, as more U.S. states legalize online gambling, driving demand for gaming-focused payment providers like this company, it seems set to see strong growth for its stateside unit.
This may very well be true. But again, its key issue, and one of main drivers for the big decline of PSFE stock, remains at hand. Revenue growth stemming from its exposure in the U.S. online gambling trend is replacing — not supplementing — revenue from its more mature segments.
That’s why Paysafe reported such lackluster numbers for Q3 2021 (ending September 30, 2021). It’s also why this fintech firm was forced to walk back on its 2021 guidance and adjusted EBITDA estimates. When it reports Q4 numbers early next month, chances are it’ll disappoint again.
As this issue carries on, with Paysafe just maintaining overall revenue/operating profits rather than growing them? The market has re-adjusted its valuation.
Paysafe Has Little Appeal to Growth and Value Investors
At around $3.75 per share today, down from $15-$20 per share, PSFE stock may look cheap. But take a closer look at its valuation. You’ll see that there’s not only not much appeal here for growth investors, but there’s not much to excite value investors with Paysafe, either.
Given the company’s high depreciation and interest expenses, it’s in the red on a net income basis. This makes it hard to compare it to peers using the price-to-earnings (P/E) metric. Yet, it does report positive EBITDA (earnings before interest, taxes, depreciation and amortization). We can use this metric instead to run comps.
At today’s prices, the stock trades at an enterprise value (market capitalization plus debt, minus cash) to EBITDA (EV/EBITDA) ratio of 14.1x. That’s a valuation not too far off from similar names. Other mature payment technology companies sport similar EBITDA multiples.
In short, Paysafe’s valuation adjustment has not made it go from overvalued to undervalued. Instead, it’s more or less trading at fair value. With this, there’s not much appeal in it as a value or deep value play.
The ‘Smart Money’ Is Jumping Ship
In December and January, there was some news of insiders, including executives, and a large shareholder, gobbling up PSFE stock after its move to penny stock levels.
Some may see this as a vote of confidence. But I would say that this alone does not prove that a comeback is in store. We may have more indication that this is the case when it next reports earnings. For now, we don’t know for sure.
We do know that, while insiders are adding to their positions, some of the “smart money” (hedge funds) holding it before have cashed out. These include Daniel Loeb’s Third Point and David Tepper’s Appaloosa Management.
According to their respective 13-F filings with the U.S. Securities and Exchange Commission (SEC), both funds have fully closed their Paysafe positions.
The Takeaway With PSFE Stock
Until its U.S. gaming-related growth adds-to rather than replaces revenue from its legacy business, there’s no reason for growth investors to own it. Until it falls to a more discounted valuation, there’s no reason for value investors to own it, either.
Earning an “F” rating in my Portfolio Grader, whether you are a growth investor or a value investor, it’s best to hold off on PSFE stock.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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