Paysafe stock valuation after falling 76% (NYSE:PSFE)

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Shares in Paysafe Limited (PSFE) have lost around 50% of their value since the online payments company presented its third quarter balance sheet. Shares have fallen more than 70% in the past year. Despite the drop, free cash flow is positive and the company could turn the tide in 2022 if the digital wallet issues are brought under control!

paysafe Ltd: price change in %
Data by YCharts

Paysafe’s central problem

Paysafe’s products enable customers who don’t have a bank account or credit card to make low-cost online payments and money transfers. The company’s online payment products are used in key growth areas like e-commerce or iGaming where Paysafe has seen strong growth in recent years. Paysafe also offers integrated processing services and a popular digital wallet for customers looking to make instant money transfers.

Paysafe Segments

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While Paysafe plays an important role in facilitating payments in the digital world, Paysafe shares surged in 2021, largely because the company’s revenue growth disappointed. Paysafe’s revenue growth has stalled over the past year, which is a problem in an industry that has been marred by growth. In the latest November revenue map, Paysafe disclosed third quarter revenue of $353.6 million, compared to $355.5 million in the prior quarter, meaning the company’s revenue base has dropped by half a percentage point. Revenue for the January-September period was $1.12 billion, but rose only a disappointing 5.6% year-over-year. Paysafe’s revenue in the third quarter of 2021 was lower than expected, adding to the pressure and driving investors away from the stock.

At the same time, the company’s losses widened due to miscalculations in the digital wallet sector. New gaming regulations negatively impacted sports betting activity in Europe and the return to normal, work-focused life after the COVID-19 pandemic hurt segment results. Revenue expectations for the digital wallet segment have been significantly lowered for FY2021 and Paysafe now expects a 10% year-over-year decline to $355 million from segment revenue for the last fiscal year.

Paysafe Digital Wallet Revenue

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Due to market regulation and competition reasons, Paysafe’s digital wallet business saw a 15.1% decline in revenue to $83.7 million in Q3’21. To address these issues, Paysafe is revamping the Skrill digital wallet to improve conversions.

Presentation of the Paysafe segment

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Paysafe also adjusted the value of its intangible assets in the digital wallet division down $322.2 million in the third quarter. Impairment, which did not affect the company’s cash position, was the main driver of Paysafe’s unexpected loss of $147.2 million in Q3’21. Due to the depreciation, Paysafe’s losses increased 4 times compared to the prior year period.

Paysafe Q3

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Issues in the digital wallet business are also affecting the company’s total revenue outlook for fiscal 2021. The company lowered its revenue forecast from $1.54 billion to $1.475 billion, posting a decline of 4%…

Paysafe outlook for fiscal year 2021

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Free movement of capital

Many companies in the “growth industry” have high annual revenue growth rates and very low free cash flow. For Paysafe, it’s the opposite. While the company’s bottom line is challenged due to the performance of its digital wallet, Paysafe is generating a ton of free cash flow. Paysafe’s free cash flow in Q3’21 was $70.1 million, which corresponds to a free cash flow margin of 20%. For the January to September period, Paysafe translated $1.12 billion in revenue into $233.3 million in free cash flow, reflecting a free cash flow margin of 21%. These margins look really, really good and offer potential for growth if Paysafe solves its revenue problem.

Paysafe Free Cash Flow

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Risks with Paysafe

Paysafe has obvious issues. The decline in revenue in the digital wallet business was so significant that total Paysafe sales fell in the third quarter. The company is also acquiring many new businesses – viafintech, PagoEfectivo, SafetyPay – to fuel its expansion into international markets, particularly in Latin America. Buying growth is a risky strategy and could lead to further writedowns if Paysafe overpays for acquisitions. However, by far the biggest challenge for Paysafe is generating revenue growth.

Low revenue growth rates

Paysafe’s revenue estimates show very little year-over-year growth for fiscal 2021 and 2022. The market cap-to-sales ratio is down a lot from last year, but a ratio of 1. 8 X remains high if Paysafe’s revenue growth turns negative.

Paysafe revenue estimates

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Final Thoughts

I’m not ready to buy shares of Paysafe just yet, but I’ll keep a close eye on the online payment provider and the company’s fourth-quarter earnings. Paysafe’s valuation drop is concerning, but not undeserved. If Paysafe stops the hemorrhage in the digital wallet sector, stocks could be repriced higher. For now, I’m on the sidelines, but if Paysafe manages to generate revenue growth again, the stock could be a big winner for investors willing to take a big risk!

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