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Q2 Earnings: August 16 - premarket
TLDR: trading near all time low on zero bad news. None of this long list has been priced in yet. Meanwhile institutions are buying 21x more than selling.
In light of China’s recent crackdown on payment processors, FinTech company Paysafe’s strategic move last year to exit those high-risk revenue channels is looking pretty smart. This de-risking will temporarily dampen Q2 YoY revenue growth, as it did with Q1, however, their CC transcripts indicate that tactical exit will likely no longer affect YoY revenue going into Q3 and Q4.
But this upcoming earnings report is less about revenue growth than it is about forward guidance and updates on their ongoing restructuring, acquisition pipeline and how their recent deleveraging will affect margins and free cash flow.
They reported strong FCF growth last quarter and a recent CNNE quarterly report revealed that, along with recently paying down $1.2 billion in debt, upon a Moody's upgrade, Paysafe successfully refinanced their remaining debt. This, overall restructuring could translate to $150+ million in cost savings annually which can dramatically improve their profit, free cash flow and M&A outlook: critical elements of their growth strategy.
Even if this ER is about forward guidance, there’s a good chance for an EPS beat which will make Q2 Paysafe’s first profitable quarter as a newly public company. Analysts’ average EPS estimate is reported to be 0.01 or 0.02 (depending on the source). We know that in Q1, without the $90+ million in one-time, non-recurring expenses associated with going public and paying down $1.2B debt, they would have beat analysts estimates with a positive EPS. For Q2, they won’t have those expenses so, unless they introduce new costs from refinancing or impairment expenses on intangible assets, there appears to be solid basis for an EPS beat. My loose guess is for 0.05 EPS or better. Not a big deal to me if it doesn’t work out that way, but it’s entirely plausible.
Regarding revenue, even though Paysafe is already integrated as a payment processor with 75% of US iGaming operators, let’s ignore the facts that
Rather than speculate about how much of that new revenue will affect Paysafe’s Q2 balance sheet, I prefer to keep my sights on analysts estimates and Paysafe’s own guidance, which has conservatively excluded US iGaming growth projections (55% CAGR).
Paysafe offers Q2 revenue guidance of $365 - $385 million. With $341 million in revenue for Q1’20, this represents 7% to 13% YoY quarterly growth. We’ve seen very little reason for them to miss this guidance. Quite the contrary.
Analysts’ average Q2 revenue estimate is reported to be between $371.5 million and $378 million (depending on the source). That's right in the middle of guidance. Last quarter, Paysafe came in at the upper range of their guidance which, given all the good news, suggests that there’s a very good chance that they’ll beat the analyst estimate. That would result in around 9% to 11% YoY quarterly growth, which would be a solid improvement from Q1.
As a long-term investor, I’ll be happy with anything above 7%. From there, any upside surprise will be welcome.
Last quarter, Paysafe confirmed their 2021 full year projections of $1.53 billion in revenue, $930-$970 million in gross profit, double-digit growth and expanding 30-35% EBITDA margins, and $103 billion in transactional volume. Paysafe’s already strong $362 million in free cash flow was reported to be on track for 29% growth in 2021.
This confirmed guidance implies that Q3 and Q4 will likely represent stronger revenue growth to compensate for the sluggish Q1 growth due to the channel exits. By Q3, Paysafe's balance sheet should reflect their many new partnerships and new US state markets opening up to legalized sports betting.
Recent Price Action
As Chairman of the Board Bill Foley recently noted, Paysafe "has been unduly punished as the inevitable shareholder rotation plays out."
Over the last few months many sources confirm regular and heavy intraday short volume (not short interest) which has successfully tanked the stock price on nothing but good news from the company. Meanwhile 13F filings continue to reveal institutions loading shares.
[Side note: Some have a hard time wrapping their heads around this but the SEC allows this type of intraday price manipulation under the shield of making a market. It's a legal loophole that allows market makers to walk down (or up) the price to shake out weak hands in order to fill institutional orders by the end of each day. It doesn't help that many financial news outlets continue to misrepresent Paysafe’s data, claiming they have only 4 employees and falsely reporting a massive Q1 EPS miss of -0.37 and -0.38 (Yahoo/CNBC). It was only 0.02. Such things can definitely deter investors who undertake proper due diligence so, hopefully, these outlets will get around to reporting accurate data.] But I digress.
While the shenanigans have gone on, bringing the price near all time lows and pushing many retail shareholders to capitulation, Fintel reports institutions are accumulating 21 times more than they are selling. Very recent 13F’s show Susquehanna increased their stake by 48% to over 3 million shares, Citigroup increased their position by 5000% to around 1.3 million shares, Bank of New York Mellon bought half a million shares and BlackRock just opened a new position of 8.3 million shares.
Whoever has been pinning the stock down has always stopped near these current levels because its more or less the price paid by respected fund managers like Dan Loeb (Third Point 41.5 million shares), David Tepper (Appaloosa Management, 10 million shares), Aaron Cohen (Survetta Capital, 13 million shares), Dipanjan Deb (Francisco Partners, 20 million shares) and Leon Cooperman (personally owns 1.1 million shares). In fact, the current price is likely below where Wells Fargo bought 13M shares, where BlackRock bought their 8.3M shares and where Blackstone took on another 37 million shares, according to their 13F's.
The current low price poses an interesting opportunity for value investors because, since those major fund managers decided to invest near this level, Paysafe has had zero bad news while steadily executing on their promised strategy to expand to new markets, invest in technology, leverage expertise in risk management and data mining, improve margins, and as Bill Foley put it, “cross-sell, cross-sell and cross-sell.”
Said in another way, because Paysafe has excluded US iGaming growth from its projections, literally none of the following developments in value creation have yet been priced in:
M&A / inorganic growth
Along the lines of value creation, Bill Foley, Chairman of Fidelity and now Chairman of Paysafe, recently reminded shareholders that Paysafe has, “an aggressive pipeline of M&A opportunities I am leading management in pursuing.”
Inorganic growth through M&A is a major pillar of Paysafe’s strategy going forward and it is significant that Bill Foley, a major shareholder, is leading the charge. Foley is a known M&A synergy wizard, particularly in the financial services arena. He took Fidelity National Financial from $3 Million market cap to $10.8 Billion. Yeah, that's 3,600X. Over just the last five years, Foley successfully grew Ceridian 3.3X ($4.2B to $14B), Dun & Bradstreet 5.6X ($2B to $11.3B), and Black Knight 8.7X ($1.6B to $14B).
Through his proven M&A playbook, Foley is also legendary for growing FIS from $1 billion to over $88 billion market cap: an 88x return. He says “Those characteristics of FIS are right in line with what we plan on doing with Paysafe.” 6,9
Foley discusses the FIS/Paysafe comparison further: “FIS operated in a highly fragmented industry. We utilize platform and technology stack to consolidate and drive organic and inorganic revenue growth and improved margins. FIS expanded its product offering, invested in technology, and improved its scale and margins of the business. Today, that $1 billion investment has a market capitalization of $88 billion. FIS has very similar characteristics to Paysafe – an attractive platform with a defensible market position. Upside from acquisition integration, platform consolidation and cross-selling. We will cross-sell, cross-sell, and cross-sell. There are multiple attractive acquisition opportunities that will strengthen our market position even further and we're positioned to win in key attractive high growth markets.”
Rounding out the Picture:
#1 global leader in iGaming, #2 digital wallet in the world, and #4 globally in integrated merchant processing. Paysafe is an extremely diversified global payment processor that is currently expanding into the US and Latin American markets. It has a transactional volume approaching $100 billion in over 40 currencies.
Through its eCash network, Paysafecard enables those without basic ID metrics, credit cards, or even bank accounts (the 1.7 billion “unbanked” globally) to engage in eCommerce in over 50 countries. This segment grew 63% YoY. Recently, Microsoft introduced Payesafecard to its Xbox platform in 22 countries.
#4 globally in integrated merchant processing, Paysafe’s proprietary scalable electronic payment platform was voted “Best Omni-Channel Payment Solution”, “Payment Processor of the Year,” and “Best Payment Method.”
Paysafe is #2 globally in the digital wallet space with a presence in 120 countries. They own Neteller and Skrill, which was voted “Best Digital Wallet” for “best consumer take up”, “most innovative technology” with “greatest potential to disrupt current ecosystems.”
Trustpilot rates Paysafecard as “Excellent” (4.7/5 stars-31,981 reviews), Paysafe’s digital wallet Skrill as “great” (4.1/5 stars-18,037 reviews) and Skrill Money Transfer as Excellent (4.8/5 stars - 8,349 reviews). 11 -- By contrast, Truspilot rates Stripe as “Average 3.4/5 stars- 6,208 reviews), Venmo as “bad” (1.2/5 starts - 222 reveiews), Zelle as “bad” (1.2/5 stars - 326 reviews) and PayPal as "bad" (1.2/5 stars-18,555 reviews). 12
It's worth repeating that Paysafe's multi-year revenue projections do not include growth from their ongoing US iGaming expansion (projected at 55% CAGR). “At Paysafe, the iGaming market volume was estimated to be $3.4 billion in 2019, and is now projected to reach $47 billion in 2025.”
Paysafe is the #1 global leader in iGaming, a space that is extremely difficult to enter, due a very complex risk and regulatory landscape. Paysafe’s expertise in multi-jurisdictional regulations is an important aspect of its competitive MOAT (as discussed below). Paysafe is also an integrated back-end payment processor so many users don’t realize they are utlizing their gateway, whether by cash, debit, credit card or digital currencies.
In the wake of a US Supreme Court decision allowing state-legalized sports betting, Paysafe is actively laying the groundwork for their US expansion. They are already integrated with 75% of all US iGaming operators.
As Bill Foley says, "we’re seeding the future growth right now by state and by operator... The day a state opens up, we are there ready from a regulatory perspective, from a risk perspective, and from a product perspective. ...It’s our job to be there first and to make sure we dominate."
He continues, "It’s going to be a land grab. We want to be out there about 10 miles ahead of everybody else... I have a vision that we should be THE digital wallet and have tie-ins with every major casino company that’s headquartered or located in Las Vegas. There will be money to be made for everybody... We’ve got a wide landscape we can attack. It’s pretty exciting”
Fund manager Dan Loeb agrees: “We believe the US is poised to become the largest online gambling market globally as it begins to deregulate state by state and Paysafe is exceptionally positioned to capitalize as the global market leader.”
Compass Point analyst Michael Del Grosso initiated coverage with an Outperform noting, “PSFE operates in high-growth verticals, has a unique advantage in its consumer and merchant facing solutions, and offers exposure to a secular growth opportunity in the potential legalization of iGaming in the United States,”
Del Grosso, who gave Paysafe a $19 price target added, “we believe there is upside to our forecasts in the event of state-level legalization of iGaming.” 5 Some headlines since Del Grasso wrote that:
Analysts universally rate Paysafe as a "BUY"
Some quotes :
RBC Capital 5-star analyst Daniel Perlin: “We believe PSFE offers a unique combination of digital wallet capabilities, accelerated cash conversion for consumers who would otherwise be out of the ecommrece loop, and integrated payments, all focused on specialized & complex end-markets, which creates a competitive moat and pricing power.” “recent underperformance is largely due to the complex nature of PSFE’s business and the FTAC II transaction” and adds his view that Paysafe offers one of the best combinations of services in online payment space: “PSFE has created a unique two-sided network enabling merchants to accept online & in-store payments (in specific niche verticals), while also offering consumers a digital wallet & eCash solution, which converts cash-heavy users to digital users. We believe it’s this combination that enables PSFE to generate superior take rate economics vs. peers.” 4
RBC recently reiterated their Outperform rating saying: “Our positive thesis is predicated on three key points including: (1) PSFE has a unique set of assets within the payments space, in that it’s a digital wallet, an integrated payment platform (with \~50% tethered to online transactions), and provides an on ramp for cash to be digitized via eCash, and it’s the combination of the three that create a two-sided market (serving both merchants & consumers), (2) new secular growth opportunity in US iGaming, which is in its early innings and could surprise investors to the upside, and (3) Bill Foley (Non-Executive Chairman) and his team have a long history of driving share holder value, which we expect to continue at PSFE.
BMO Capital, 5-star analyst, James Fotheringham: “PSFE is a global leader in iGaming (online betting related to sports, poker, and other casino games, as well as lotteries and bingo). Indeed, 36% of PSFE’s revenues are from global iGaming. That is far more than for any of its peers.” iGaming deposit volumes in the U.S. will grow “at more than five times the rate of growth elsewhere in the world” with a "5-year CAGR (compound annual growth rate) of between 40% to 55%." 3
Evercore ISI analyst David Togut 'praised Paysafe for its “robust risk management operation,” and its high rankings in several key performance indictors globally, including cash network, stored digital wallet value, and amount of partnered independent merchants.' 2
MOAT: “robust risk management operation”
So why does Paysafe dominate iGaming and how is it able offer eCommerce services to the unbanked?
Their industry leading multi-jurisdictional regulatory expertise offers a durable advantage in spaces where competing fintechs are hesitant or unwilling to enter. CEO Philip McHugh from CC transcripts : “When we talk about a deep and a wide MOAT, this is absolutely one of the areas that we see that benefit where it’s hard to copy.…We have over 300 professionals dedicated to risk, compliance, and analytics. That is very, very rare in the payments space. It’s a real strength of ours. We’ve been able to track some of the top people in the industry, including the former CRO from PayPal, and we’ve upgraded the team, we’ve built some real data capabilities, and we see this continuing to be an area of differentiation for Paysafe versus others.”
“We can de-risk some transactions where the market has abandoned many of these players…we bring millions of consumers into the ecosystem. We bring unique ways to pay and access funds that a typical card processor certainly can’t do. When you have that two-sided network, you change the conversation. When we speak to some of our largest iGaming customers, we’re not only talking about take rates and comps, we’re talking about revenue-generation, we’re talking about attracting the types of customers that they want and they need in their ecosystem. That’s a really, really powerful position to have.” 9
A while back I looked at a basket of fintech peers including PayPal, Square, Nuvei, Repay, Shift4, Adyen, Affirm, BILL, GPN, and Paysign.
Paysafe reports 30%+ EBITDA margin, mid-to-high teen EBITDA growth, and $362 million in free cash flow (now on track to increase 29%),
By comparison, a third of the peer group reported negative EBITDA, half reported negative EBITDA growth, and a third negative free cash flow.
Paysafe also has better EPS than over half the group and better Debt/EBITDA ratio than 3/4 of them.
The group's collective growth rate of ~12.5% is in the range of Paysafe's 10-13% projections but the company's estimates may be intentionally conservative as they do not take into account M&A growth (recent new acquisition) nor their current expansion into US iGaming.
Since 2017, Paysafe grew revenue 65% from $864 million to $1.418 billion (28% CAGR pre-Covid). Last year, due to Covid-related brick-and-mortar business and sporting event closures, along with their exiting high-risk Asian revenue channels, 2020 revenue stagnated. This is the reason they recently reported only 5% YoY quarterly growth. In their Q1 ER, management noted that, without those channel exits they would have reported growth in the “mid to high teens.” But even if you include 2020’s stagnant growth, their overall revenue growth since 2017 was still 18% CAGR. This is roughly the same as PayPal’s current projected growth. Incorporating US iGaming growth will of course reveal a whole new picture.
Given all the above factors, it seems fair to look at Paysafe's potential price based on an average of the multiples for the above peers:
Average : $46.52
In a nutshell, the basket of sector peers has an average growth within Paysafe’s conservative projections yet they trade at 350-750% higher multiples. With Paysafe having better financials than most, it is hard to argue that this is proportionate. Either the entire field has to come down or Paysafe has to go up. Veteran market analyst Steve Grasso's call for "$45/55" may actually be quite reasonable.
This is not investment advice. For those who do want to invest in Paysafe, my only advice is to stay away from options. I’ve watched this stock for a long time and the market makers have a track record of ruthlessly blowing up those positions. Common shares is the way.
(1) see institutional ownership (WSB won’t allow link)