This Reverse-Stock-Split Stock Is Down 90%, but Is It a Buy Ahead of the Next Bull Market?

Paysafe (PSFE -3.21%) is a relatively small company, with a market capitalization of just $1.3 billion, so it flies under most investors’ radar. But that might not be the case for long, because it’s a key service provider to fast-growing industries like e-commerce and online gambling.

Paysafe went public through a special-purpose acquisition company (SPAC) merger in late 2020, and after a short honeymoon, it began to slump. As of the end of 2021, it was down by more than 60% from its initial price, and the broader sell-off in the technology sector of 2022 took it down even further. It now trades at a valuation about 91% below its peak, and 83% below its initial price.

Indeed, its fall was so steep that it just completed a reverse stock split to keep its price above the $1-per-share minimum that a company must maintain to remain listed on the New York Stock Exchange.

Here’s how a reverse stock split works

Regular stock splits are usually executed by companies that have seen significant gains in the value of their shares. If a stock price soars into the hundreds or even thousands of dollars, it can become less accessible to small retail investors. A stock split increases the number of shares in circulation, which, in turn, organically reduces the price per share, solving the problem without affecting the company’s underlying value.

A reverse stock split works in the opposite way. If a company’s share price falls too low, it can become noncompliant with the rules of the exchange upon which it trades. If it stays out of compliance for a set length of time, the stock can be delisted. A reverse split shrinks the number of shares in circulation and, in turn, organically increases the price per share, thus lifting the stock back into compliance with the exchange’s rules.

On Dec. 12, Paysafe completed a 12-for-1 reverse split. For every 12 Paysafe shares an investor previously owned, they received a single new share, which resulted in the price per share rising twelvefold. Paysafe stock closed at $1.21 on Dec. 12, so its post-reverse-split price was $14.52.

Since then, the stock has climbed to $21 on the back of the broader stock market recovery — despite a recent pullback, the S&P 500 is up 11% from its October lows, more than halfway to the 20% rebound that could signal the approach of a new bull market. With big technology stocks potentially set for a strong year, could Paysafe’s run continue?

Paysafe serves a growing need

At the moment, online sports betting is legal in 25 U.S. states, and more are expected to legalize it in years to come. The industry is building momentum, with more than 40 sportsbooks fighting for bettors’ business, and so it’s becoming increasingly difficult for those operators to differentiate themselves. 

Paysafe conducted a study in November that highlighted gamblers’ priorities when choosing a platform. Easy payouts were essential to 36% of respondents — outranking brand trust, promotions (sign-up bonuses), and, surprisingly, odds. 

If a sportsbook wants to retain customers, then delivering a smooth payment experience is crucial — 75% of those surveyed said it factored into their decisions to continue betting on a given platform. 

A frictionless payment experience is exactly what Paysafe provides to some of the world’s largest online betting platforms, especially those entering the U.S. market, including DraftKings and PointsBet. It does so through its Skrill, Neteller, Paysafecard, and Paysafecash solutions. 

But it’s not only about online gambling. Paysafe facilitates payments for the travel industry, e-commerce platforms, streaming and online gaming providers, and even digital asset platforms including cryptocurrency exchanges. 

But the company faces challenges

Paysafe operates an incredibly stable business, but that comes with drawbacks. When the company reports its full-year financial results for 2022 on March 9, it’s expecting to reveal $1.49 billion in revenue at the high end of its guidance — but that would represent practically no growth from 2021. 

That’s not a terrible result given the challenging economic conditions last year, as inflation surged through the global economy, which hurt consumer spending. But unfortunately, sluggish revenue growth has become a trend for Paysafe’s business, which is a key reason the stock began to slide following its public listing in 2021.

A chart of Paysafe's annual revenue from 2019 to 2022.

But online gambling has been a bright spot. In the Q3 2022, Paysafe’s online gambling revenue in North America grew by more than 45% year over year. (Unfortunately, it was offset by broad weakness in the company’s digital commerce segment.) Given that online sports betting in the U.S. is still ramping up, there could be substantial upside from this segment for Paysafe in the future.

Paysafe stock is a good value right now

Based on Paysafe’s overall revenue picture, it’s not surprising investors have sold off the stock, but its 90% plunge from its peak might have been overdone.

Investors value the business at just $1.3 billion at recent prices, which means the stock trades at a price-to-sales (P/S) ratio of less than 1. That’s a substantial discount to other companies in the payments space; PayPal trades at a P/S ratio of 3.1, and Fiserv trades at a P/S ratio of 4.2. Both companies had relatively muted revenue growth of less than 10% last year.

The key difference is that Paysafe isn’t profitable, whereas the other two are. But it’s still relatively small and in the process of scaling up, particularly in the U.S.

If Paysafe’s online gambling revenue continues to grow at a rate similar to its recent rate, this stock could look like a bargain a few years from now. Plus, its digital commerce revenue — which has lagged recently — should see a further boost as the economy recovers. 

It’s far from a slam dunk, but Paysafe does present an intriguing risk-reward proposition and a unique way to play the emerging U.S. online sports betting industry.