Fintech stock Payfare keeps Buy rating with Eight Capital

Canadian fintech company Payfare (Payfare Stock Quote, Charts, News, Analysts, Financials TSX:PAY) recently reported its third quarter financials, which were lower than expected, according to Adhir Kadve, analyst for investment bankers Eight Capital. Kadve delivered a report on Payfare on Friday where he maintained a “Buy” rating on the stock, saying its potential opportunity within the gig economy workforce is still huge.

Payfare provides financial services to gig workers and it partners with companies like DoorDash and Lyft to give gig workers immediate access to their earned wages. The company reported its Q3 2022 on November 9, coming in with revenue of $35.9 million, which represented a 183 per cent year-over-year improvement. Gross profit rose to $6.9 million and adjusted EBITDA was $1.3 million compared to negative $2.2 million a year earlier.

“We are excited to announce record growth in both Adjusted EBITDA and Operating Cash Flow in the third quarter,” said Marco Margiotta, CEO and Founding Partner, in a press release. “Fourth quarter user growth in both ride share and delivery is tracking ahead of third quarter levels. We remain focused on growth and are able to deploy capital opportunistically including funding the launch of new products and other strategic growth opportunities.”

Looking at the Q3 numbers, Kadve said the $35.9 million topline was under his forecast at $36.5 million as well as below the consensus call at $37.2 million, while gross profit at $6.9 million (for a 19 per cent margin) was below his forecast at $9.1 million (25 per cent margin) and the Street’s $8.1 million (22 per cent margin). Adjusted EBITDA at $1.3 million was also light compared to Kadve at $2.5 million and the consensus at $1.7 million.

“Payfare reported Q3 results that came in lower than consensus estimates while maintaining its FY guidance,” Kadve wrote. “User additions (which were pre-released) this quarter slowed drastically, as key cash back reward programs aimed at high fuel costs were not renewed and the company faced seasonality during the summer months within the food delivery segment. That being said, Payfare’s operating leverage is driving profitability and cash flow generation.”

Kadve said a good sign is that Payfare’s key partners like Lyft and DoorDash continue to get more deeply involved in the Payfare ecosystem and are looking to double or triple their penetration rates over the next six to 12 months, with management saying the growth will be spurred on by new initiatives like cash back rewards. 

Along with a maintained “Buy” rating, Kadve kept his 12-month target at $17.00 per share, which at press time represented a projected return of 235 per cent.

“We think execution on organic user growth via penetration of existing platforms, recovery in ride share volumes and Paid app platforms will warrant multiple expansions for Payfare moving forward. Key risks to our target include, persisting high fuel prices and the macroeconomic environment,” Kadve said.