Entering the last week of 2023, the S&P 500 is up about 24%, erasing its 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 tech companies. The Nasdaq 100 tech index, a large-cap growth index, is up 53% this year.
But indexes are just that, and they don't tell every stock's story. Not every stock, or even every growth stock, is participating in the market rally. Digital payments processing company Paysafe (PSFE -0.28%) is down 18% in 2023 and more than 95% from its highs after going public, and it trades at a dirt-cheap valuation. Is this a buying opportunity or a value trap?
Digital payments for high-risk industries
Paysafe offers digital payments solutions for many industries, including high-risk areas like gambling and foreign-exchange trading. It's also geared toward a higher-risk population that's underbanked and uses cash. It's like PayPal, but for companies that target cash payers or deal in complex sectors. However, it has plenty of users who just like its interface. For example, its peer-to-peer payments service, Skrill, has similar ratings to PayPal's Venmo and Block's Cash App.
Given that it serves regular businesses as well as solves problems for niche companies, it has a solid revenue stream and growth opportunities in fintech. However, it has been dealing with the same pressure as its peers in the current challenging macro environment. Customers are being more careful about spending, and dealing with a higher-risk population in an elevated interest rate environment poses its own problems.
In the 2023 third quarter, Paysafe's revenue increased 8% over last year. The digital wallets segment in particular is gaining momentum, and that bodes well for the future. The merchant solutions segment was up 6% from last year in the third quarter, while digital wallets was up 12%. Average transactions per user increased 40% year over year, and average revenue per user increased 25%.
Image source: Paysafe.
Management focused on expanding this segment in 2023, with enhancement to the platform and new features. Its 2024 goals are to drive growth in the small business and eCash businesses.
The fintech segment is still expanding, and it's picking up steam again after a dip in e-commerce after the pandemic lockdowns ended. According to Statista, total transaction value in digital payments is expected to grow at a compound annual rate of 11.8% through 2027. Paysafe is carving out a niche in this expanding field.
Is this cheap stock worth the risk?
Although Paysafe isn't profitable, it has demonstrated improvement in earnings before interest, taxes, depreciation, and amortization (EBITDA) and earnings on an adjusted basis, meaning excluding various expenses. Management believes these results reveal the business's underlying health, but investors should pay close attention to net profitability.
Paysafe works with high-risk clients and isn't reporting spectacular growth. Revenue has increased only 9% in the company's lifetime as a public company since March 2021, and what makes it even riskier is that it's low on cash. It had $226 million as of the end of the third quarter and $481 million in available funds, and net debt of $2.3 billion.
At the current price, Paysafe stock trades at the dirt-cheap valuation of less than 0.5 times trailing-12-month sales. That illustrates low investor confidence. Wall Street's average price target is 21% higher than the recent price of about $11.40. That's not bad, though not one of the six analysts covering Paysafe calls it a buy.
This is a risky stock right now, and there are plenty of others with more upside potential or lower risk that could be better options.
