Paysafe Limited (PSFE) is an online payments company with a portfolio of brands, including Paysafe, Skrill, paysafecard, Paysafecash, and Paysafe. Paysafe specializes in payment processing, digital wallets, and online cash solutions.
On March 30, 2021, Paysafe became a public company, having completed a business combination with Foley Trasimene Acquisition Corp. II, a special purpose acquisition company. One of the key catalysts that move stocks is earnings.
Shares of Paysafe declined 42% at the close of the U.S. stock market on November 11, 2021, as Paysafe announced its third-quarter 2021 results. Was the selloff from a closing price of $7.27 on November 10, 2021, to $4.24 the next day an overreaction of the market? I am bearish on PSFE stock now, arguing that this massive selloff was justified.
Paysafe is down approximately 76% year-to-date and has underperformed the S&P 500 and Dow Jones, which have gains of roughly 21% and 13%, respectively.
Paysafe Business News
Paysafe is currently facing numerous securities class action lawsuits by law firms due to violations of the Securities Exchange Act of 1934. In just one of the many lawsuits, the following self-explanatory information was stated:
"CASE DETAILS: According to the filed complaint: (1) Paysafe was being negatively impacted by gambling regulations in key European markets; (2) Paysafe was encountering performance challenges in its Digital Wallet segment; (3) new eCommerce customer agreements were being pushed back; and (4) as a result of the foregoing, Defendants' positive statements about the Company's business, operations, and prospects were materially misleading and/or lacked a reasonable basis."
While these numerous class action lawsuits may have a temporary effect, if they turn out to be material, they will continue to add selling pressure to PSFE stock.
Materially misleading information by the management of a public company is very serious and can result in its shares becoming out of favor for a long time. To answer whether this selloff is justified, we need to look at its third-quarter financial results.
Q3 Results: Missed Revenue Expectations, Lowered Outlook
Paysafe reported revenue of $354 million, missing analyst predictions by 4.6% and a loss of $0.20 per share, much larger than the analyst's consensus.
The good news was that compared to the third quarter of 2020, there was an increase of 19% in Total Payment Volume to $31.1 billion, and free cash flow reported was $70.2 million, compared to $58.8 million in the prior year.
The bad news was that the net loss widened to $147.2 million, compared to a net loss of $38.1 million in the third quarter of 2020. This was due to a non-cash impairment charge of $322.2 million. Furthermore, the company lowered its Fiscal Year 2021 guidance for revenue, gross profit (excluding depreciation and amortization), and adjusted EBITDA. The prior estimate of $1.53 – $1.55 billion in revenue was revised to $1.47 – $1.48 billion.
Investors were also not impressed that the Digital Wallet segment showed weakness, with revenue down 15.1% year-over-year for Q3 2021.
Another notable risk factor is that its debt-to-equity ratio is 90.5%, which is very high for a money-losing business.
Wall Street's Take
Turning to Wall Street, Paysafe has a Hold consensus rating, based on one Buy and four Holds assigned in the past three months. The average Paysafe price target of $5.38 represents 50.5% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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