Payfare Stock: Buy, Sell, or Hold?

Down 48% from all-time highs, Payfare is a fintech growth stock trading at a massive discount to consensus price target estimates.

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Investing in undervalued small-cap growth stocks is a proven strategy to beat the broader markets and derive game-changing returns over time. One such TSX stock is Payfare (TSX:PAY), which has trailed the major indices since its IPO (initial public offering) in March 2021.

Valued at $334 million by market cap, Payfare stock is down 48% from all-time highs, allowing you to buy the dip. Payfare is a fintech company that offers digital banking and instant payment solutions for the gig workforce. It has partnered with leading marketplaces such as Uber, Lyft, and DoorDash to provide its workforce with a portfolio of online banking products and solutions.

Payfare is part of an expanding addressable market

Payfare enjoys a first-mover advantage, allowing it to onboard marquee clients from the most popular gig economy platforms globally. According to Payfare, its global addressable market is US$455 billion, providing the company with massive room to grow its top line given its revenue in the last 12 months has totaled “just” $174.4 million.

Payfare has increased its sales from $13.45 million in 2020 to $130 million in 2022. Its operating losses have also narrowed from $16.16 million to $3.78 million in this period. A key driver of Payfare’s top-line growth is the ability to expand user growth. For instance, the number of active users on Payfare’s platform has risen from less than 150,000 in the first quarter (Q1) of 2021 to over 1.25 million at the end of October 2023.

Moreover, Payfare’s low cost-of-acquisition business model and recurring sales should allow It to generate cash flows across business cycles. It already owns and operates a highly scalable fintech platform and can enter new verticals and other global markets in the upcoming decade.

How did Payfare perform in Q3 of 2023?

In Q3 of 2023, Payfare reported revenue of $47.7 million, an increase of 35% year over year. Payfare generates over 70% of its revenue from network exchange fees from payment networks and the rest from user banking fees such as ATM withdrawals, foreign exchange, and money transfers.

In 2023, the company forecast sales between $185 million and $195 million with adjusted earnings before interest, taxes, depreciation, and amortization between $21 million and $24 million. Payfare is focused on winning new white label partnerships which includes potential international expansion with existing partners.

Further, Payfare has launched credit products for its user base and continues to expand its portfolio of solutions while partnering with new merchants to grow its suite of cashback and loyalty rewards for cardholders.

With $56 million in cash and no debt, Payfare is positioned to fund its expansion plans by the cash flows it generates.

Is Payfare stock undervalued?

Analysts tracking Payfare stock expect revenue to rise to $234.7 million in 2024, up from $129.9 million in 2022. Moreover, unlike several other growth stocks, Payfare is profitable and is forecast to end 2024 with earnings of $0.58 per share, compared to a loss of $0.06 per share in 2022.

So, PAY stock is priced at 12 times forward earnings, which is really cheap. Analysts remain bullish and expect the TSX growth stock to increase roughly 50% in the next 12 months.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Payfare. The Motley Fool recommends DoorDash and Uber Technologies. The Motley Fool has a disclosure policy.

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