Paysafe (PSFE): Valuation At 2.2x Forward Revenue Seems Cheap

Description

I recommend buying Paysafe (NYSE:PSFE). The PSFE payment platform is especially important in today’s market because legacy solutions are no longer adequate to support the major changes taking place in the payments industry. PSFE, in my opinion, is well-positioned to meet the growing demand for digital wallet solutions as it can provide these features through a single solution with seamless integration. Furthermore, PSFE has a strong focus on the iGaming and Emerging Markets sectors, which are expected to grow significantly as technology improves.

Company overview

PSFE is a payment platform. PSFE facilitates the transfer of funds between businesses and consumers by linking payment processing, digital wallets, and online cash services.

Legacy solutions are no longer good enough to support the fundamental changes in the payments industry

Legacy payment and eCommerce service providers are finding it difficult to operate retail eCommerce solutions built on legacy payment and risk management systems while simultaneously keeping up with the increasing complexity of global digital commerce. Digital wallets are a rapidly growing industry, but older platforms and providers don’t have the specialized functionality, advanced risk management, and proper compliance infrastructure needed to support it.

Customers are increasingly interested in these novel offerings due to their desirable characteristics, such as the capability to keep value in a digital wallet and access it in a number of practical ways. In contrast to their parents, many members of Generation Z and Millennials are either unfamiliar with or uncomfortable with using conventional payment methods, including bank accounts, credit cards, debit cards, and online banking. Their interest is piqued by the fact that these options come equipped with extra features that make online shopping both more secure and more convenient.

As an alternative, think about omni-channel interaction, which is just one of the many market trends that are revolutionizing the business world. Consumers today anticipate frictionless interactions with brands and retailers across many touchpoints (in-store, online, and mobile), multiple payment types, multiple geographies, and multiple media (in all cases). Therefore, companies are on the lookout for partners who can supply all of these features, as well as the sophisticated data and insights necessary for efficient business management, through a single solution and seamless integration.

To that end, I think PSFE has a solid foundation on which to build and will expand in tandem with the sector as a whole.

PSFE targets the iGaming and Emerging markets vertical

PSFE serves a wide range of Digital Commerce verticals, with a particular emphasis on iGaming and Emerging Markets, two regions where I see a lot of room for development and growth.

The iGaming industry is extremely regulated, thus, effective cross-border commerce calls for specialized knowledge, significant technological development, and a well-developed legal framework. I feel there is a big opportunity to serve the iGaming providers due to the complexity, regional variation, and ongoing evolution of the rules governing this sector as a result of its emphasis on risk management. Significant benefits exist in responding to this enormous and alluring market potential if one can develop and deliver products and services that adhere to appropriate legislation. As technology improves, I expect iGaming’s share of the global gaming business to grow because consumers will have easier digital access to more sophisticated products. More people having internet access, more people using smartphones, and more people playing video games online are all things I see as positive trends that will help this industry expand.

PSFE uses its processing expertise to offer integrated payment services to thousands of businesses in emerging market sectors. As such, the availability of PSFE gateway and risk management features is a win-win situation for businesses. PSFE also offers Fintech Services, which include support for stock, currency, and cryptocurrency traders as well as remittance services geared toward consumers. Finally, PSFT offers Digital Goods, which is driven mostly by its eCash Solutions division, which helps online retailers (such as streamers). PSFE, I believe, is ideally positioned early on the adoption curve, giving it a significant first-mover advantage if any of these nascent verticals achieves broad adoption thanks to its participation in them.

PSFE solution addresses the challenges in targeted verticals and has global reach

With the help of PSFE solutions, issues unique to digital commerce can be solved, major obstacles to the user experience can be eliminated, and transactions can be completed in less time and with less risk. The Paysafe Network is essential to this process because it expands PSFE’s capabilities beyond conventional payment methods (i.e., cards) and enables local digital wallets to be monetized. In addition, PSFE allows buyers and sellers to communicate and conduct business in more intricate marketplaces, such as the gaming industry, where standard services tend to fail. I believe PSFE also made the right call by providing conventional services like online payment processing and merchant acquisition for small and medium-sized businesses while setting itself apart by enhancing these offerings with cutting-edge technological innovations. This is a good idea because it increases PSFE’s TAM and, as established services are “safer” than developing verticals, it might give PSFE a stable source of income.

The Paysafe Network further expands PSFE’s ability to communicate with customers on a global scale through both online and offline mediums. Compared to other local solutions, PSFE’s ability to ease international trade thanks to its unique blend of expertise and in-depth knowledge of the domestic business climate and regulatory regimes gives it a major competitive edge.

Strong barriers of entry

I think PSFE has built a defensible, high-barrier-to-entry business because of its highly differentiated product and extensive global reach. In my perspective, new entrants will have a hard time matching PSFE’s worldwide universal presence with strong domestic capabilities, the unique Paysafe Network, first-mover advantage in developing sectors, and 20+ years of deep domain understanding in digital commerce. More importantly, in my opinion, it is very challenging to replicate the ability to create, execute, integrate, and secure innovative solutions for retailers and customers in highly regulated countries.

Power network effects

In my opinion, PSFE has built a unique environment that is sustained by strong, positive network effects. PSFE solutions allow them to build new digital commerce solutions while maintaining connections with and serving existing businesses and consumers. In my opinion, new markets and use cases will become available to PSFE’s users as the company continues to gain traction among active users for their solutions and attract interest from enterprises. PSFE is able to provide a wider range of services and solutions because the Paysafe Network is growing in both breadth and depth alongside the company.

Valuation

I believe PSFE is worth USD22.45 in FY23, a 70% increase from the time of writing. This is based on my model with the following assumptions:

1. Revenue will meet expectations in FY22, and growth will accelerate back to high single digits in FY23 and 24. I believe PSFE’s growth momentum will resume as it continues to ride on the emerging vertical’s secular trend.
2. PSFE is currently valued at 2.2x forward revenue, which is near an all-time low. Putting aside the possibility of mean reversion (as growth re-accelerates in FY23/24), even if PSFE trades at the same valuation in FY23, the upside is still significant.

Key risk

Focus on emerging verticals carries inherent risks

PSFE caters to highly regulated sectors where regulations are fluid and open to varying interpretations. For example, PSFE’s business model depends a lot on the online gambling and foreign exchange trading industries. If new laws were passed that shut down these verticals, PSFE would be hit hard.

Summary

I recommend to go long PSFE. The payment industry is changing dramatically, and legacy solutions are no longer adequate to support these changes. PSFE is well-equipped to meet the needs of consumers and businesses in this changing landscape, thanks to its payment processing, digital wallet, and online cash services. Furthermore, PSFE has a strong focus on the iGaming and Emerging Markets sectors, both of which have significant growth potential. The company’s expertise in these areas, combined with its ability to provide products and services that meet regulatory requirements, provides it with a competitive advantage in these markets.