Could this dirt-cheap stock fall 95% from its peak in 2024?

By | December 22, 2023

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The last week of 2023 starts S&P500 is up about 24%, erasing losses from 2022. Much of those gains are coming from growth stocks that are back in favor with investors, concentrated in some of the best-known technology companies. The Nasdaq100 The tech index, a growth index for large caps, is up 53% this year.

But indexes are just that, and they don’t tell the story of every stock. Not every stock, or even every growth stock, is participating in the market rally. Digital payment processing company Payment secure (NYSE:PSFE) is down 18% through 2023 and more than 95% from its post-IPO highs, and trades at a dirt-cheap valuation. Is this a buying opportunity or a value trap?

Digital payments for high-risk sectors

Paysafe offers digital payment solutions for many industries, including high-risk areas such as gambling and currency trading. It also targets a higher-risk population that is under-resourced and uses cash. It’s like PayPal, but for companies that focus on cash payers or trade in complex sectors. However, it has many users who simply like the interface. For example, the peer-to-peer payment service Skrill has similar ratings to Venmo and PayPal Block‘s Cash App.

Since it serves mainstream businesses and solves problems for niche companies, it has a solid revenue stream and growth opportunities in fintech. However, in the current challenging macro environment, it has faced the same pressures as its peers. Customers are more cautious about their spending, and dealing with a higher-risk population in a higher interest rate environment comes with its own set of problems.

In the third quarter of 2023, Paysafe’s turnover increased by 8% compared to last year. The digital wallet segment in particular is gaining momentum, and that bodes well for the future. The Merchant Solutions segment rose 6% in the third quarter compared to last year, while digital wallets rose 12%. Average transactions per user have increased by 40% year over year and average revenue per user has increased by 25%.

Paysafe growth statistics in digital wallets.Paysafe growth statistics in digital wallets.

Image source: Paysafe.

Management focused on expanding this segment in 2023, with improvements to the platform and new features. The goals for 2024 are to stimulate the growth of small businesses and eCash companies.

The fintech segment is still expanding and regaining momentum following a dip in e-commerce after the pandemic lockdowns ended. According to Statista, total transaction value in digital payments is expected to grow 11.8% annually through 2027. Paysafe is carving out a niche in this growing field.

Is this cheap stock worth the risk?

Although Paysafe is not profitable, it has shown improvement in earnings before interest, taxes, depreciation and amortization (EBITDA) and profit on an adjusted basis, i.e. excluding miscellaneous expenses. Management believes these results reveal the underlying health of the business, but investors should pay close attention to net profitability.

Paysafe works with high-risk customers and does not report spectacular growth. Revenue has grown just 9% over the company’s lifetime as a public company since March 2021, and what makes it even riskier is that it is cash-poor. At the end of the third quarter, it had $226 million, $481 million in available funds and net debt of $2.3 billion.

At the current price, Paysafe shares trade at the dirt-cheap valuation of less than 0.5 times twelve-month sales. This illustrates the low investor confidence. Wall Street’s average price target is 21% higher than the recent price of around $11.40. That’s not bad, although none of the six analysts following Paysafe call it a buy.

This is a risky stock right now, and there are plenty of other stocks with more upside potential or lower risk that could be better options.

Should you invest $1,000 in Paysafe now?

Please consider the following before purchasing shares in Paysafe:

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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Block and PayPal. The Motley Fool recommends the following options: Short December 2023 $67.50 on PayPal. The Motley Fool has a disclosure policy.

Could this dirt-cheap stock fall 95% from its peak in 2024? was originally published by The Motley Fool

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