Issue #23: The specialized payments platform taking over online gambling and a promising EV company flying under the radar 🔋
Ray Dalio runs the world's biggest hedge fund, Bridgewater Associates.
Very few people know that Bridgewater Associates started in a 2 bedroom apartment before it employed 1,500 people and managed around $150 billion in assets.
One of the key lessons you can take away from Ray is: don't be a reactive decision-maker.
Most investors react purely to where the stock price is heading.
They think a company must be good if the stock price is going up and must be bad if the stock price is going down.
This isn't always the case.
Ray indicates that price is the amount that you pay while value is the amount that you get. A good company can have its stock under-priced.
A lower stock price could mean you can buy more of a valuable company at a discount.
While a higher stock price could mean paying a premium for less value.
This advice might seem obvious but it can be easy to forget when making trades.
Let's get into this week’s report. Here’s what we found:
- A specialized payments platform that is tapping into several rapidly growing industries.
- A promising EV company flying under the radar, that is forecasted to generate $2.3 billion in revenue by 2023.
Paysafe Limited ($PSFE)
$12.01 - Share price at the time of writing
- Paysafe returned to the public market via a SPAC merger with blank check company Foley Trasimene Acquisition Corp.
- The company is well-positioned to benefit from the global growth of iGaming (online gambling).
- Paysafe reported solid revenue growth from iGaming and e-commerce payments in its recent Q1 results.
- Earlier this year Paysafe partnered with Coinbase to allow its users to trade digital assets and cryptocurrencies.
What they do:
Paysafe is a payments processing platform that specializes in online transactions.
The company is made up of three segments: digital wallets, eCash and integrated processing.
Digital wallets: Paysafe owns Skrill and NETELLER. These are widely recognized digital wallets. Skrill allows customers to spend money online instantly between different sites, transfer money between bank accounts for free, buy and sell crypto and earn cash rewards through its loyalty program.
eCash: Paysafe allows merchants to offer cash as an alternative online payment option by integrating a pre and post-pay eCash solution that comes with a 100% payment guarantee and no risk of chargebacks.
Integrated processing: Paysafe offers custom-made checkout options for point of sale (POS) and e-commerce payment processing that can be used by brick and mortar businesses as well as online businesses.
Why they’re spiking in interest:
According to MarketStream.io, the total Reddit mentions of $PSFE over the past week have increased by over 2000% compared to the previous week.
The surge in mentions of $PSFE was likely driven by a combination of factors.
Paysafe was added to the Russell 3000 Index on 25 June 2021 which likely caught the attention of the Reddit community. The hype continued to build around the stock as investors believe the stock is underpriced and could be the next Square Inc.
Notable comments from Reddit:
"Going all in on $PSFE... Incredibly undervalued and such an amazing long term play" - Mike-Shunt
"just buy $PSFE they are the monopoly when it comes to online sports betting. Most if not all online gambling site use them." - vegancash
💸 Signal: During Q1 2021, billionaire hedge fund managers Daniel Loeb, Ken Griffin and David Tepper purchased over $640 million worth of Paysafe shares. Source - cheaperthanguru.com
Why PSFE could be valuable:
The sheer volume of payments Paysafe processes is staggering.
Paysafe's estimated total volume for FY 2021 is expected to grow to $103 billion. With revenue expected to rise by 10% compared to the previous year to $1.52 billion.
Gross profit for the year is set to come in at $961 million as blended gross margins of its three operating segments will settle between 61-63%.
Paysafe's recent Q1 results also showed plenty of positive signals:
- iGaming revenue in North America grew by 66% year on year.
- eCash volume and revenue were up 60%+ year on year.
- Partnered with Coinbase in the U.S and now have digital wallets live on 27 crypto sites/exchanges.
Paysafe is a pick and shovel business. This means the company can ride several growth trends at once via the different industries it serves.
Currently, the most exciting growth trend is iGaming.
iGaming is a blanket term that refers to online sports betting, online casinos, fantasy sports, and poker. Paysafe is already a global leader with a presence in Europe since 1999.
Paysafe allows players to fund their betting accounts through a secure Paysafe transaction.
The company saw 66% year-on-year revenue growth related to iGaming in its Q1 2021 results.
It now has its eyes set on the U.S market as states continue to legalize online gambling.
Paysafe is already live in 15 states and supported by over 35 operators including companies like DraftKings Inc and Caesars Entertainment Inc which support Paysafe as a payment option.
The U.S. iGaming market is expected to grow at a compound annual growth rate of 55% by 2025. More states are set to legalize some form of online gambling over the next year which is likely to drive short-term growth.
Paysafe is also seeing solid momentum outside of iGaming. eCash revenue climbed 63% year-on-year to $112.9 million, now representing 30% of the total business. Adjusted EBITDA increased by 110% year-on-year to $48.1 million.
This growth was driven by a couple of factors.
Paysafe is partnered with Microsoft Inc as a payment option on the Xbox console and the Microsoft.com site which is live in 20 countries. Fortnite and Twitch also use Paysafe's eCash network to handle payments.
Paysafe also gained traction in financial services with investment trading platforms like eToro supporting the Skrill digital wallet. Paysafe also partnered with Coinbase Inc and is live on 27 crypto sites/exchanges for digital wallets.
Bottom line: Paysafe is a leader in specialty payments, serving industry verticals and that are currently overlooked by larger competitors like PayPal Inc and Square Inc.
What the risks are:
The growth expectations for payment fintech companies are high.
Paysafe's low double-digit revenue growth may seem muted when compared to some of its competitors growing at triple digits year on year. Until the US iGaming market gets into full swing it is unlikely for Paysafe to reach these levels of growth.
This may turn off some investors in the short term.
Its previous private equity owners Blackstone and CVC also left behind an overextended balance sheet that has already spent most of the cash raised from the SPAC transaction earlier this year.
Fisker, Inc. ($FSR)
$19.20 - Share price at the time of writing
- Fisker Inc. is a California-based EV company focused on designing and developing electric vehicles.
- The company has ramped up investment and hiring to fast-track the product development process and add more vehicles to its product portfolio.
- Management is well-experienced in the EV and automobile industry and has the skills to turn its vision into reality.
- Fisker's asset-light business model allows the company to scale up production rapidly.
What they do:
Fisker Inc. is a California-based EV company focused on designing and developing electric vehicles.
Its first vehicle, Fisker Ocean, is an electric SUV that is expected to be ready for sale by the end of 2022.
The manufacturing process of the Fisker Ocean is outsourced to Magna, which has an annual capacity to produce 240,000 units.
Fisker went public in October 2020 through a reverse merger with a SPAC.
Why they’re spiking in interest:
According to Gambiste.com, $FSR is currently one of the most tweeted mid-cap companies based on data from 06/27/21.
Gambiste.com uses a proprietary algorithm that filters out spam and weighs each user mention depending on the account's reputation.
Meanwhile on Reddit, compared to other EV companies such as Workhorse (30,000 mentions), Canoo (13,000 mentions) and NIO (173,000 mentions) Fisker has flown under the radar with only 7,000 (approx.) total mentions to date.
The recent growth in tweets for $FSR was likely driven by the announcement on 06/22/21 that Fisker will be joining the Russell 3000 Index on June 28 after the market opens.
💸 Signal: Fisker has caught the eye of several well-known investors. Jim Simons, Stanley Druckenmiller and Ken Griffin purchased approximately $70 million worth of shares in Fisker during Q1 2021. Source - cheaperthanguru.com
Why FSR could be valuable:
Fisker was founded on the vision to build the most sustainable vehicles in the world.
So far, the company is on track to achieve this.
The company's flagship vehicle, the Fisker Ocean, has a solar roof that generates a clean (and free) energy source which gives it an impressive driving range. The company also uses recycled materials in the interior of the car.
Fisker has secured two major partnerships with international contract manufacturers (Foxconn and Magna).
Magna has an annual capacity to produce 240,000 vehicles. The company has decades of experience working with brands like Daimler, BMW, Toyota, Jaguar, etc.
While the partnership with Foxconn is expected to start from Q4 2023.
The targeted production is 250,000 vehicles per year with pricing per vehicle starting below $30,000. This deal alone could generate nearly $3.75 billion annually after 3 to 5 years, assuming an average selling price of $25,000 and an annual production of 150,000 vehicles.
These partnerships allow Fisker to focus on vehicle design and development, while its manufacturers handle the production process.
This approach means Fisker requires less capital to ramp up production. Meanwhile, other EV startups like Workhorse and Lordstown will likely have to resort to significant equity dilution to have enough liquidity when they enter mass production.
Earlier this year, Magna confirmed that it is collaborating with Fisker to develop a new ADAS feature.
ADAS stands for Advanced Driver Assistance System which includes features such as automatic emergency braking, driver drowsiness detection, pedestrian detection and autonomous driving.
Fisker's ADAS package will leverage cameras and ultrasonic sensors plus a unique and first-to-market digital imaging radar technology.
The technology will be used in the Fisker Ocean initially but can be applied to all of Fisker's upcoming models. This technology will play a major role in differentiating Fisker from other car manufacturers.
Fisker is currently forecasted to generate $2.3 billion in revenue for 2023 which will be its first full year of operations.
During the early days of Tesla (2010 to 2015), the company was valued at an average of 8x sales.
Applying a conservative multiple of 5x sales to Fisker's forecasted revenue would result in a market capitalization of $11.5 billion, or about 100% higher than it is today.
This would equal a share price in the mid-$30s by the end of 2023.
Bottom line: Fisker has a differentiated product, is working with world-class manufacturers and is well-positioned to ride the transition to EVs.
What the risks are:
Since Fisker is currently pre-revenue you should view it as a high risk, high reward stock.
The company is completely dependent on contract manufacturers to produce its vehicles. Lower control over the manufacturing process in turn leads to lower control over the company's ability to meet production targets in time.
Technology in the EV space is developing quickly.
Delays to the production process could also mean existing technology gets improved before Fisker is able to produce at scale. Meanwhile, competitors could arrive with a better product, making it difficult for Fisker to recover money spent on research and development.
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