Paysafe (NYSE:PSFE) stock has been on a wild rollercoaster ride since its public debut in March 2021. The company is a specialized payments provider operating in three main segments, Integrated Processing, Digital Wallet and eCash Solutions. It went public after merging with special-purpose acquisition company (SPAC) company Foley Trasimene Acquisition II Corp.
PSFE stock is down about 42% in 2021. It has an average rating of buy based on input from nine analysts with data taken from MarketWatch. But even so, the bullish case isn’t that straightforward and simple.
Its latest earnings report had plenty of good news, but also some bad news too. Specifically, it increased revenue and beat expectations in the process. It also posted a net profit compared to a loss for the same period a year ago.
Still, investors were not thrilled. The stock fell 13% on the month after the report. The reason for the dip? Paysafe’s guidance for fiscal Q3 2021 and the full year well fell short of Wall Street’s expectations.
So after all of this turbulence, many wonder if PSFE stock is a bargain.
While there’s some reason for optimism, there are at least two major problems that make me skeptical about Paysafe moving forward. Let’s take a closer look.
PSFE Stock: The Good News
First, let’s start with some of the good news.
Paysafe, a digital commerce solutions company, is not a brand-new company. According to its website, the company is “a market leader with over 20 years of experience in payments.”
It provides a wide range of online payments solutions: “From online to in-store payments; from merchant acquiring to payment gateways; from alternative payments to omni-channel and secure cross-border e-commerce; from white-label credit solutions to mobile order and delivery platforms, we offer businesses an unbeatable one-stop solution.”
So, it is a specialized payments platform bringing together consumers with businesses. It has a portfolio of brands with notable names such as Skrill, a virtual wallet for money transfers and online payments, and Neteller, a solution to transfer money overseas.
Paysafe has been making strategic acquisitions and building partnerships to expand in eCash. It has also made moves to open banking payments in Latin America, where it has become a leader in the region. This includes the acquisition of PagoEfectivo and SafetyPay.
Prospective PSFE stock investors should also consider exciting news about its expansion in Europe. It has an agreement to acquire a market-leading German fintech company, viafintech, in an all-cash transaction.
Meanwhile, in the U.S., there is news of an expanded partnership with Betfred USA Sports, where it is targeting the online sports betting market.
These acquisitions could help Paysafe secure its future as a leader digital commerce space. Even so, its true goals are a little muddy moving forward.
After sifting through all these news stories, it appears that its focus is online gambling. After all, another new partnership with Golden Nugget shows that Paysafe’s focus on the sports betting market.
Q2 2021 Earnings: Positive Results, Missing Expectations
A stock can fall if the earnings are good but expectations are not met. That’s the case with Paysafe. Specifically, “[f]or the third quarter, the company said it expected revenue of between $360 million and $375 million. Analysts were calling for revenue of $384.4 million.” This miss likely played a large role in the pain PSFE stock has suffered more recently.
But moving past the disappointment, here’s a quick look at the highlights from the second-quarter 2021 results, as outlined by the company in its report:
- “Total Payment Volume of $32.3 billion, increased 41%
- Revenue of $384.3 million, increased 13%
- Net income attributable to the Company of $6.6 million, compared to net loss of $15.9 million
- Adjusted EBITDA of $118.8 million, increased 8%
- Reaffirmed 2021 full year outlook”
Although I’ve detailed some positive aspects regarding Paysafe, it’s not without issues. There are two main problems with Paysafe right now.
Interest Coverage: Not Strong Enough, Possible New Debt?
According to Gurufocus Paysafe has an Interest Coverage ratio of 0.72x. Simply put, according to Gurufocus, “Interest Coverage is a ratio that determines how easily a company can pay interest expenses on outstanding debt. It is calculated by dividing a company’s Operating Income by its Interest Expense … Ben Graham prefers companies interest coverage is at least 5. Paysafe Ltds earnings cannot cover its interest expense. If the situation continues, the company may have to issue more debt.”
So I see a liquidity problem. MarketWatch data supports my concern. Paysafe has a current and quick ratio of 0.22x and a cash ratio of 0.05x. All of these ratios are considered too low. In fact, they’re well below the acceptable value of 1.0x — that is the neutral zone, where it’s possible for a company to avoid liquidity issues.
Revenue Growth Is Sluggish
If you take a look at revenue growth, you’ll add even more salt to the wound. After all, PSFE’s revenue growth is sluggish.
Admittedly, we do not have a lot of data here because Paysafe went public in 2021. However, according to Yahoo! Finance total revenue for 2018, 2019 and 2020 was $1.14 billion, $1.41 billion and $1.42 billion, respectively. This is a growth revenue rate of just 0.7% in 2020 compared to 2019.
When you consider that Paysafe is losing money, I am not so thrilled now about PSFE stock. Its management team says that they “are pleased with the continued momentum Paysafe exhibited over the second quarter with impressive growth and several key wins across iGaming and other attractive digital commerce verticals, including crypto.” However, I can’t ignore these problematic revenue growth and liquidity problems. Paysafe is not in an ideal business situation, making it hard to recommend as a potential stock to buy.
On the date of publication, Stavros Georgiadis, CFA 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.