Markets

This Growth Stock Is Riding the Online Gambling Boom

Innovation in the financial sector continues to enable new opportunities in emerging industries. As some forms of online gambling spread across America, there's a need for secure payment solutions to process customer transactions. Few business models require taking custody of customer funds (think stock brokerage accounts, for example), so it's crucial that transfers to and from customers are safe, reliable, and fast.

Paysafe (NYSE: PSFE) is the parent company of Skrill, a digital wallet provider, and Neteller, which is used to facilitate payments between consumers and merchants. Through these two brands, the company is the global payments leader in what's becoming known as the iGaming industry, serving online casinos, sports books, and even the emerging esports craze. It has brand-new partnerships with sports betting companies in the U.S., and the segment is growing rapidly.

Three people in a pub holding their smartphones.

Image source: Getty Images.

Paysafe's big opportunity

Gambling is a controversial industry, and historically, the U.S has been hesitant to loosen restrictions on its practice. But the tide appears to be turning, with 22 states now legalizing sports betting at in-person venues, and 14 of those allowing consumers to participate online.

Online casinos are subject to more stringent restrictions, with only five states legalizing them so far (and it's unlikely to expand much further). Nevada, a sixth state, allows online poker but naturally prefers to protect its physical casino business in Las Vegas, the heart of America's gambling industry.

All segments combined, online gambling was worth $1.978 billion in the U.S. in 2020, and it's expected to grow at a 17.3% compound annual growth rate until 2026.

Some of the largest online bookmakers in the world offer Paysafe's Skrill and Neteller products as deposit options, and the company is leveraging those relationships to move into the U.S. market alongside them.

In June, Paysafe expanded its commercial agreement with Europe-based Flutter Entertainment to integrate Skrill and Paysafecard into its Fox Bet subsidiary's Michigan operation. The two companies have already partnered successfully through Fox Bet Colorado, New Jersey, and Pennsylvania. And for the past decade, Paysafe has powered transactions for Flutter's enormous global brands Pokerstars and Betfair.

The company is also capturing new entrants, too. Skrill is powering payments for Australia-based bookmaker PointsBet in its new venture into Michigan.

Paysafe has already taken a leadership position in the U.S iGaming payments segment. It's now operating in 15 states.

Financial highlights

Paysafe went public back in March through a deal with Foley Trasimene Acquisition Corp. II (a special purpose acquisition company). It has since announced first-quarter earnings for 2021, and they revealed promising growth in key digital segments.

The company's expansion into the U.S gambling industry yielded 66% revenue growth year over year. Similarly, its eCash segment generated 60% revenue growth for the same period, driven by a partnership with Microsoft's Xbox platform, on which Paysafe helps facilitate online gaming payments in over 20 countries.

The company also expanded an existing deal with Coinbase Global, allowing American users to buy and sell cryptocurrencies within the Skrill digital wallet. It "white-labels" the Coinbase exchange to power the customer experience, and the deal was a contributor to Paysafe's eCash segment performance.

Metric

Q1 2020

Q1 2021

Growth

Total transaction volume

$25.6 billion

$27.7 billion

8%

Total revenue

$359.7 million

$377.4 million

5%

Data source: Company filings.

While its overall financial performance appears somewhat uninspiring, there's an underlying growth boom in the exciting eCash segment.

Metric

Q1 2020

Q1 2021

Growth

eCash transaction volume

$1.0 billion

$1.5 billion

61%

eCash revenue

$69.1 million

$112.9 million

63%

Data source: Company filings.

It's only 30% of total revenue, but as online gambling and gaming continue to grow across the U.S., Paysafe is presented with a big opportunity to leverage this segment. It also has Paysafe's highest EBITDA margin -- 42.6%, compared to 30% for the company overall.

Why you should own it

It's unlikely state governments will rescind recent progress in legalizing gambling, and as more states sign on, it increases pressure for others to do the same. That makes Paysafe a great long-term buy, especially since the stock is down 25% since it went public, offering investors a nice discount.

With a $7.8 billion market cap at recent prices, Paysafe trades at just 5 times projected 2021 sales, and analysts also expect the company will deliver a profit of $0.06 per share this year. It's fairly close to a break-even result, but analysts expect earnings growth of more than 200% in 2022.

Paysafe is an experienced payments company that's already dealing with some of the biggest online providers in the world. It's incredibly well equipped to benefit from the growth in digital gambling and gaming trends, and that makes it a great bet for the future.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Flutter Entertainment, Flutter Entertainment PLC, and Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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