Payfare is a Buy on the pullback, says Eight Capital

Shares of Canadian fintech stock Payfare (Payfare Stock Quote, Charts, News, Analysts, Financials TSX:PAY) fell sharply after the company’s release of first quarter results this week. But the pullback was undeserved, according to Eight Capital analyst Adhir Kadve, who provided a comment on Friday, saying any dip in profitability due to new product development shouldn’t be a concern for investors.

Toronto-based Payfare provides financial services to gig economy workers, giving them easy access to their earned wages, and has partnerships with companies like Uber, Lyft and DoorDash. The company reported its Q1 2023 financials on Wednesday, coming in with revenue up 76 per cent year-over-year to $42.3 million and about 1.1 million active users, up 62 per cent from a year earlier and up seven per cent from the previous quarter.

Adjusted EBITDA was $3 million for the quarter compared to negative $0.9 million a year earlier, and the company reaffirmed its 2023 guidance which calls for $21-$24 million in EBITDA on $185-$195 million in revenue.

“We are pleased to once again demonstrate strong free cash flow generation and earnings profitability in the first quarter of 2023,” said Marco Margiotta, CEO and Founding Partner of Payfare, in a press release. “We remain extremely optimistic on the underlying fundamentals of our core business model which we expect to supplement with new partnerships and product shelf enhancements over the balance of the year.”

Payfare’s share price has been on an impressive run, gaining almost 60 per cent in value since the start of the year. But the stock dropped 12 per cent on Thursday after the Q1 release before gaining back 3.5 per cent on the Friday.

Kadve said Payfare’s Q1 revenue was in-line with expectations but earnings were slightly lower than expected. He said key growth investments in headcount for new product development are likely to impact profitability for the company but that as those new products are being demanded by Payfare’s platform partners like DoorDash, the end result will be a further enhancement and entrenchment of that relationship, spurring further penetration into, for example, the Dasher base, according to Kadve. 

The analyst added that more personnel will also help Payfare with bringing online late-stage, white label partnerships currently being negotiated.

“While the increase in headcount will compress margins over the near-term (though we note the company did reiterate its FY guidance), it should lead to ongoing strong growth for Payfare moving forward,” Kadve wrote. 

“Thus, in our view, [Thursday’s] share price decline was overdone, and we see current levels as an attractive buying opportunity for investors to initiate a position or add to an existing position,” he said. 

With the update, Kadve reiterated a “Buy” rating and $17.00 target on PAY, which at press time translated to a projected one-year return of 188 per cent.