There has been a growing apprehension about entities listed through special purpose acquisition companies. The Securities and Exchange Commission has already been scrutinizing “misleading earnings projections” made by SPAC sponsors. On a relative basis, investor frenzy for SPACs might have declined. However, SPAC business combinations do provide exposure to some quality businesses. Paysafe (NYSE:PSFE) stock is one name that’s worth considering.
Let’s start with the upside potential for PSFE stock. Credit Suisse analyst Timothy Chiodo recently initiated coverage on PSFE stock with an “outperform” rating. Timothy has a price target of $17 for the stock. This would imply an upside potential of 41% from current levels of $12.0.
Timothy points out that currently “1% of PSFE’s total revenue is tied to U.S. online gambling payment processing.” This segment can be the single biggest growth driver for the company in the next few years.
The U.S. online gambling industry is expected to grow at a CAGR of 15.4% between last year and fiscal year 2025. The company has relationship with almost all top online gambling operators in the U.S.. PSFE stock is therefore a proxy play in the U.S. online gambling industry.
The recent meltdown in cryptocurrencies might have made investors skeptical. However, I believe that cryptocurrencies are on-track for wider adoption. Paysafe has already made inroads in this high-growth segment.
The company has expanded partnership with Coinbase (NASDAQ:COIN) in the United States. Additionally, the company’s payment solution is like in 27 cryptocurrency sites and exchanges. As crypto investing and trading activity swells, Paysafe is positioned to benefit.
Therefore, exposure to the U.S. online gambling and cryptocurrency segment is likely to drive sustained growth.
Strong Fundamentals Support Upside Thesis
For the first quarter of 2021, Paysafe reported revenue of $377.4 million, which was higher by 5% on a year-on-year basis. For the same period, the company’s adjusted EBITDA was $113.2 million. This implies an EBITDA margin of 30%.
An important point to note is that in the e-cash solutions segment, the company reported revenue growth of 63% to $112.9 million. Adjusted EBITDA for the segment was higher by 110% to $48.1 million.
The segment therefore has an EBITDA margin of 42.6% as compared to the company level EBITDA margin of 30%. With strong growth in the e-cash segment, it’s likely that EBITDA margin will expand in the coming quarters. As a matter of fact, Paysafe has guided for an adjusted EBITDA margin of 32% for FY2021.
Further, between FY2020 and FY2023, the company is targeting annual organic revenue growth of 10%. Importantly, during this period, the company expects adjusted EBITDA margin expansion of 500 basis points. The guidance seems realistic considering the potential growth from exposure to U.S. online gambling and cryptocurrencies. Growth in e-cash segment will be the margin driver.
In their presentation, Paysafe has also talked about potential mergers as a growth trigger. As of March 2021, the company reported $274 million in cash and $225 million in un-drawn credit facility. Therefore, there is financial flexibility to pursue growth.
For Q1 2021, Paysafe reported operating cash flow of $48.7 million. This would imply an annualized OCF of $195 million. With likely EBITDA margin expansion in the coming years, the company is positioned for healthy cash flow growth.
Estimates from Juniper Research indicate that spending through digital wallets will exceed $10 trillion by FY2025. Strong presence in e-cash and digital wallet segment will benefit Paysafe in the coming years.
With these factors in Consideration, PSFE stock looks attractive from a medium to long-term perspective.
With an asset light business mode, the cash flows can be redirected to deleveraging. As of Q1 2021, the company’s leverage was 4.2. Paysafe has guided for leverage to decline to 3.7 by the end of the year. Inorganic growth seems like a possibility with improved financial flexibility.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.