After Paysafe’s (NASDAQ:PSFE) fourth-quarter (Q4) results showed that its profitability is improving, while three of its key businesses are rebounding significantly, I remain upbeat on the long-term outlook of PSFE stock.
On the other hand, I believe that there are two reasons to be cautious on the shares going forward. Specifically, the resignation of the company’s chairman, Bill Foley — a very well-known, successful investor — could signal that he has become less optimistic about Paysafe. And secondly, the company is increasing its exposure to cryptocurrency, whose value looks poised to tumble relatively soon.
Given the latter two points, I would advise certain investors to add a relatively small amount of the shares in the near-term.
Multiple signs indicate that Paysafe’s profitability is generally improving. First, in Q4, its earnings before interest, taxes, depreciation, and amortization (EBITDA), excluding certain items, climbed 10.6% year-over-year (YOY) to $105.5 million. Additionally, the company’s adjusted EBITDA margin increased to 28.4% last quarter, versus 25.7% during the same period a year earlier.
It appears that the 3.4% YOY increase was largely driven by revenue increases in its U.S. acquiring business and cost cutting.
The company’s acquiring unit provides businesses with “full-service [payment] processing solutions.” Specifically, the revenue of its U.S. acquiring business jumped 9.7% YOY to $166.8 million. And on the cost-cutting front, Paysafe’s Chief Executive Officer Philip McHugh noted that the company had reduced is spending by $40 million in all of 2021.
Actions that Paysafe took last year to improve its digital wallet, including cutting prices, prioritizing its core product, and improving users’ experience are all starting to bear fruit, McHugh reported on the conference call. Specifically, he noted that “Across 19 targeted countries in Europe, we saw monthly bank deposits increased more than 50% and total deposits increased more than 10% by implementing the changes from October to February.” And in North America, the volumes of its digital wallet tripled in Q4 versus Q3.
Additionally, Paysafe began marketing in partnership with Penn National’s (NASDAQ:PENN) Barstool Sports, a prominent player in the sports betting sector. Paysafe also signed partnership deals with Bally’s, a major regional casino operator, and Hard Rock Digital, which has the valuable Hard Rock brand name behind it.
And as I pointed out previously, the revenue of its acquiring unit surged 10% YOY. Meanwhile, in all of 2021, the volume of its U.S. Acquiring business surged 35%.
Reasons to Be Cautious on PSFE Stock
On Mar. 2, Paysafe announced that its chairman, Billy Foley, had resigned his position and left the company’s board. According to the company, he had chosen “to focus on other commitments.”
A very successful entrepreneur, Foley has “created literally tens of billions of dollars in shareholder value,” as another InvestorPlace contributor, Vince Martin, pointed out last year. Martin also explained that “an investor at basically any point since the mid-1980s could have entrusted her capital to the Foley ’empire’ and almost certainly have beaten the broad market in the process.”
As a result of Foley’s very strong record, his involvement in Paysafe was one of the key factors behind my optimism about PSFE stock. His decision to resign as chairman and leave the board makes me wonder if he has grown frustrated with the company for some reason and/or has decided to sell a high percentage of his shares of the company. Of course, such a development would make me significantly less bullish on the company’s shares.
Meanwhile, Paysafe is becoming much more involved in cryptocurrencies. For example, it is partnering with Binance, which McHugh described as “the largest crypto exchange in the world.”
As I’ve noted in past columns, I believe that the value of cryptos is largely determined by the amount of stimulus provided by the U.S. government. Therefore, as Washington’s stimulus fades and gets further in the rearview mirror, I expect the value of cryptos to plunge. Additionally, given the hostility of some high-ranking federal officials to cryptos, I think there is a good chance that Washington will look to stymie the sector, causing cryptos’ value to sink further.
These developments could very easily have a major negative influence on PSFE stock.
The Bottom Line on PSFE Stock
Paysafe has many positive attributes. And, since the shares are trading at a low valuation of just 1.5 times its trailing sales, its valuation is attractive.
Still, given my reservations about the company, I recommend that risk-tolerant investors looking for exposure to the beaten-up payments sector buy only a relatively small amount of the shares at this point.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.