Payfair: The market is mispricing the company’s growth potential (TSX:PAY:CA)

All figures are in Canadian dollars unless otherwise stated.

Unless otherwise noted, all financial information is from Seeking Alpha.

Investment Thesis

Payfare now has over 1.4 million active users On a growing platform, they It has zero debt on its balance sheet, is in good financial health, and is currently trading at a significant discount to its historical valuation multiple.

Considering these factors, we believe Payfare is well poised to capitalize on the growth of the gig economy and, as the market has yet to realize Payfare’s full potential, it makes for a great potential small-cap investment to consider for future growth.

background

Pay Fair (TSX:Payment: CA)(OTCQX:PYFRF) was founded in 2012 by Marco Margiotta, Keith MacKenzie and Ryan Charles Deslip as a fintech company providing instant payment and digital banking solutions to gig economy workers in Canada, the United States and Mexico.

Gig economy workers are people who do short-term, flexible work such as ride-sharing, freelancing, food delivery, etc. The largest employers in North America include familiar names like Uber, Lyft, DoorDash, Instacart, and Grubhub.

When you take a ride with Uber, the money is usually deducted from your account after the ride is over. But the money goes to Uber first. Uber then pays the gig worker on a pre-specified cycle, be it weekly, bi-weekly, or monthly (like most jobs). That’s where Payfare comes in, offering instant payouts to gig workers. Partnered It has partnered with Lyft, DoorDash, and Uber, and one of the services these companies provide is giving gig workers instant access to funds.

Payfare also offers mobile banking solutions, including current accounts, direct debit and online banking tools.Payfare earns revenue through transaction fees (such as fees for ATM withdrawals), subscription fees (such as for more advanced services offered by Payfare), interchange fees (such as when a gig worker uses a Payfare card to purchase an item and collects a fee from the merchant), and partnerships.

Financial Strength

Payfare has accumulated just over $355 million in assets ($357.5 million) and liabilities of $280.4 million as of March 31, 2024. Approximately 71% of Payfare’s assets are held in restricted cash ($253 million), which is offset by pre-funded liabilities of $253 million, which is consistent with the company’s business model.

Excluding this debt, Payfare has debt of $27.4 million and a cash and cash equivalents balance of $84.7 million. Including the value of its other assets and liabilities after excluding restricted cash accounts, Payfare’s current net debt balance is -$84.6 million. More importantly, since Q4 2022, Payfare has increased this net debt balance from $42.6 million to $84.6 million.

We believe this financial strength has acted as a catalyst as it has allowed Payfare to acquire smaller competitors entering the market and accumulate a cash balance that has enabled it to invest the proceeds in other projects to support further growth. This has given Payfare the financial flexibility to respond to a wide range of market scenarios. Increase in common stock With a compound annual growth rate of 21.4% over the past three years, Payfare Return on equity over the past 12 months: 25.5%Payfare expects to continue to grow its cash reserves, providing it with further growth opportunities.

Market Growth

The gig worker market Rapid expansion In the United States, gig economy total dollar volume is projected to grow from $204 billion in 2018 to $455.2 billion in 2023, a compound annual growth rate of 17.41%.

We believe this trend will continue due to the flexibility and autonomy that freelance work offers, the additional income it offers, and the ability to develop important skills such as communicating with others. Market research A compound annual growth rate of 16.18% is predicted from 2021 to 2031, with the market size expected to reach $1,864.16 billion.

The projected growth of the gig economy, combined with Payfare’s financial strength, gives the company a unique opportunity to capitalize on emerging market trends, unlocking the potential for multiple revenue streams in the future.

Payfair has two goals for 2024 It will expand existing partnerships with partners, including Uber, and continue to expand into new areas of business, such as integrations with payroll and time management providers.

Payfare is well positioned to benefit from the projected growth of the gig economy. Capitalizing on this growth should enable Payfare to continue supporting its growth to date while maintaining the current strength of its balance sheet.

Trading below historic multiples

Payfare is a fast-growing company, but it is going through a period of slowing growth. Relative We take a longer-term view of key pricing multiples over the past six months to compare with growth seen several years ago, as we expect these multiples to have narrowed to reflect this “slowed” growth.

The following information was taken from Capital IQ as of May 31, 2024.

Click to enlarge

Based on a valuation multiple that takes into account both the actual results over the past 12 months and what the market expects for the next 12 months, Payfare appears to be undervalued given its current low valuation multiple.

One counterargument to this is that Payfare’s business and/or business model have changed or been adjusted significantly within the last six months. However, we have not found conclusive evidence of this as Payfare has broadly achieved the 2023 guidance figures it set at the end of 2022 and is on track to achieve the 2024 guidance figures it set in 2023.

Therefore, in the absence of any estimate changes or downward projections from the company, the market may be undervaluing Payfare’s growth prospects, which provides potential investors with an opportunity to take advantage of this relative undervaluation.Furthermore, Payfare’s financial strength has improved dramatically since 2022, with book value per share increasing 50.47% since the end of 2022 (author’s calculations).

We believe the market is beginning to value Payfare as a mature company rather than a growth company, which is not consistent with Payfare’s forecasts of market growth and expansion potential.

risk

As with any investment, a variety of risks can undermine our investment thesis. While the risks presented are not exhaustive, we believe the primary headwind that could impact our thesis is that growth does not materialize.

Growth won’t happen

Our investment thesis is generally based on the idea that the gig economy will continue to expand and that Payfare will capitalize on this growth. Moreover, if the growth materializes and Payfare is unable to capture this growth, we will find ourselves in the same situation of a failed growth story.

We believe there are two main reasons why our investment thesis fails.

1. Failure to increase active users and/or increase revenue
2. Inability to maintain key partnerships or allow larger companies to enter the market

Regarding point 1, as of Q1 2024, Payfare had 1,423,502 active users. In Q4 2023, Payfare had 1,400,127 active users. This means that active users grew by approximately 1.67% quarterly. This is the lowest quarterly growth rate since Payfare started reporting this number, with the next smallest quarterly growth rate being 1.93% from Q2 2023 to Q3 2023. This isn’t too worrying when you look at the year-over-year number of 26.26% in Q1 2024.

We understand that there have been a few quarters of stagnant growth, but we feel it is important to monitor this trend closely because without user growth, Payfare cannot grow revenue, and therefore profits.

Regarding the second point, Payfare needs to maintain key partnerships with Uber, DoorDash, and other gig market giants because this is where Payfare is gaining recognition and growth on the platform. While we think it’s unlikely that partners will abandon them without ample warning, we believe it’s prudent to be mindful of the potential risks.

Conclusion

In conclusion, we believe Payfare is well-positioned to benefit from significant growth in the gig economy, supported by its strong financial position, growing active user base, and historically relatively cheap valuation. Potential risks, however, include failure to grow user numbers and maintain key partnerships, which are essential to capture the expanding gig economy market. Overall, Payfare offers promising small-cap investment potential with strong growth potential and financial flexibility.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.