After going public via SPAC in late 2020, Paysafe Limited ( NYSE: PSFE ) soared over 100%, yet so far, it has had an uneventful year.
The stock is now below the initial listing price and important psychological support of US$10.
We will be examining the latest earnings results and gauging the intrinsic value through a discounted cash-flow (DCF) valuation.
The company just posted Q2 earnings results
- Net income: US$6.6m
- Revenue: US$384.34m (beat by US$5.9m)
- FY2021: US$1.53-1.55b vs. consensus US$1.55b
Furthermore, the company also announced the acquisition of SafetyPay for US$441m. SafetyPay is an eCommerce-focused payments platform that operates mainly in Latin America. Along with the previous acquisition of a similar Peruvian-based platform, PagoEfectivo, this puts Paysafe in a prime position to dominate this segment in the region.
The fintech acquisition mania now seems to be in the full swing.
The latest in the line of acquisitions is Berlin-based Viafintech , which offers the largest bank independent payments structure in Germany, Austria, and Switzerland. The all-cash transaction has just been announced, with the details expecting to surface within the week.
Yet, these cash acquisitions at reasonably high multiples keep weighing on the company. Especially knowing that it currently holds US$248m of cash with over US$2b of debt and interest payments of over US$50m per quarter.
Before diving into the calculation, we need to point out that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model .
We're using the 2-stage growth model, which means we take two stages of the company's growth. In the initial period, the company may have a higher growth rate, and the second stage is usually assumed to have a stable growth rate.
In the first stage, we need to estimate the cash flows to the business over the next ten years.Where possible, we use analyst estimates, but when these aren't available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value.
We assume companies with shrinking free cash flow will slow their rate of shrinkage and that companies with growing free cash flow will see their growth rate slow over this period. We do this to reflect that growth tends to slow more in the early years than in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today,and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
|Levered FCF ($, Millions)||US$449.1m||US$556.2m||US$635.9m||US$703.5m||US$760.0m||US$807.3m||US$847.2m||US$881.7m||US$912.0m||US$939.4m|
|Growth Rate Estimate Source||Analyst x2||Analyst x2||Est @ 14.33%||Est @ 10.63%||Est @ 8.04%||Est @ 6.22%||Est @ 4.95%||Est @ 4.06%||Est @ 3.44%||Est @ 3.01%|
|Present Value ($, Millions) Discounted @ 9.2%||US$411||US$467||US$489||US$495||US$490||US$477||US$458||US$437||US$414||US$390|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$4.5b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage.
For several reasons, a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case, we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way, as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 9.2%.
Terminal Value (TV) = FCF 2031 × (1 + g) ÷ (r - g) = US$939m× (1 + 2.0%) ÷ (9.2% - 2.0%) = US$13b
Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = US$13b÷ ( 1 + 9.2%) 10 = US$5.5b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value,which in this case is US$10b.
In the final step, we divide the equity value by the number of shares outstanding.Compared to the current share price of US$8.2, the company appears quite undervalued a 41% discount to where the stock price trades currently.
Just recently, BofA Securities cut the price target to US$12 from US$15, but even the new target represents a high potential upside.
Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The calculation above is very dependent on two assumptions. The first is the discount rate, and the other is the cash flows.
The DCF does not consider the possible cyclicality of an industry or a company's future capital requirements, so it does not give a full picture of its potential performance.
Given that we are looking at Paysafe as potential shareholders, the cost of equity is used as the discount rate rather than the cost of capital (or the weighted average cost of capital, WACC), which accounts for debt.In this calculation, we've used 9.2%, which is based on a levered beta of 1.298.
Beta is a measure of a stock's volatility compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, a reasonable range for a stable business.
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company.It's not possible to obtain a foolproof valuation with a DCF model.Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation.If a company grows at a different rate, or if its cost of equity or risk-free rate changes sharply, the output can look very different.Can we work out why the company is trading at a discount to intrinsic value? For Paysafe, we've compiled three fundamental aspects you should consider:
- Risks: For example, we've discovered 1 warning sign for Paysafe that you should be aware of before investing here.
- Future Earnings: How does PSFE's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart .
- Other Solid Businesses: Low debt, high returns on equity, and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, search here .
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.