Paysafe (NYSE:PYSE) is a profitable payments company and a leader in the digital wallet and integrated processing industry. But here’s the thing about PSFE stock now — it’s trading at full value. However, that doesn’t necessarily mean the stock won’t rise. In fact, I suspect that it could move about 25% higher over the next year to $14.41. Let me explain how.
First, since the company went public via a reverse merger with a special purpose acquisition company (SPAC) at the end of March, it has fallen. At the time, the stock was at $15.10, but it closed at $11.50 as of Jul. 12.
Moreover, at the same time, PSFE stock now looks to be at the same valuation parameters as a number of its peers. That is the main reason why I think it’s trading at fair value.
These two points are the bad news. But here’s the good news: Paysafe is extremely profitable.
PSFE Stock: Free Cash Flow Estimates
On May 11, Paysafe reported excellent profits for the quarter in its first financial release as a public company. Moreover, it also increased its guidance for both Q2 and the full year of 2021. This is the basis for my feeling that PSFE stock has the ability to rise at least 25% to $14.41 or higher over the next year.
My optimism starts with the company’s own guidance. First, on Page 19 of its own presentation, Paysafe showed that it made $108.5 million in free cash flow (FCF) during Q1. This represents a huge portion of its revenue. Additionally, the presentation shows that Paysafe produced $377.4 million in revenue during Q1 (Page 8). That means that its Q1 FCF margin was very high at 28.75% (i.e., $108.5 million/$377.4 million).
This means we can project out Paysafe’s FCF for the upcoming year. For example, Seeking Alpha shows that analysts project $1.71 billion in sales for 2022. Similarly, Yahoo! Finance shows that analysts estimate $1.7 billion.
On Page 14 of its Q1 slide deck, though, Paysafe also provides guidance for its 2021 revenue. The range is between $1.53 and $1.55 billion. That means that forecast FCF could hit $442.75 million this year. This is seen by multiplying its 28.75% FCF margin to its revenue forecasts. Moreover, in 2022, Paysafe might produce $490 million in FCF in 2022. This is seen by multiplying 0.2875 by $1.705 billion. Basically, its FCF could rise by 10.67%.
Valuing PSFE Stock Using FCF Yield
The best way to value PSFE stock is to use an FCF-yield metric to value its free cash flow.
FCF yield is the result of dividing a company’s FCF by its market capitalization. For Paysafe, the stock had an $8.32 billion market cap as of Jul. 12. So, if we divide its forecast 2021 FCF of $443 million (see above) by its $8.32 billion market value, PSFE stock has an FCF yield of 5.32%.
That is actually a good deal higher than many of its peers. For example, Paypal (NASDAQ:PYPL) has a forward FCF estimate of $5.76 billion, according to Seeking Alpha. Since it has a market cap of $352.67 billion, its FCF yield is much lower at 1.63%. Using the same method, Wex (NYSE:WEX) has a 2% FCF yield. In fact, the average of four other stocks and PYPL stock on Seeking Alpha’s “peer” page for PSFE comes to an FCF yield of 4.7%.
If we use this metric and apply it to Paysafe’s 2022 FCF estimate, here is the result: by dividing $490 million in FCF for 2022 by 4.7%, the target market cap works out to $10.426 billion. But Paysafe had a market cap of $8.32 billion as of Jul. 12.
In other words, Paysafe’s market value could rise by 25.3%. This also means that the target price for PSFE stock should be $14.41 (i.e., $11.50 x 1.253).
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any position in any security mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.