Monday’s TSX breakouts: This fintech stock has soared 66% in 2023 with a further 83% forecast

On today’s TSX Breakouts report, there are 42 stocks on the positive breakouts list (stocks with positive price momentum), and six securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a soaring small-cap stock that is on the positive breakouts list – Payfare Inc. (PAY-T). This fintech stock has climbed 66 per cent year-to-date, and analysts believe the share price may continue to charge higher. The average one-year target price implies a potential price return of 83 per cent.

A brief outline on Payfare is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Toronto-based Payfare is a fintech company whose customers include drive sharing providers Uber Technologies Inc. (UBER-N) and Lyft Inc. (LYFT-Q) as well as food delivery provider DoorDash Inc. (DASH-N). The company’s technology allows gig workers to receive nearly immediate payment for their services. Earnings are transferred to gig workers’ digital Payfare bank accounts or Visa or Mastercard co-branded cards. Payfare accounts and cards are issued by its banking partners.

The company generates revenue from two main sources. First, interchange fees, which are fees paid by merchants whenever a purchase is made using a Payfare Visa or Mastercard. Second, Payfare earns revenue from banking fees such as ATM withdrawals.

Investment thesis

• Rapid revenue growth. Revenue totaled $1.2-million in 2017, $3.6-million in 2018, $6.3-millon in 2019, $13.4-million in 2020, $41.97-million in 2021, and $129.9-million in 2022.
• Inflection point for the company with Payfare turning profitable in the fourth quarter of 2022. The consensus earnings per share estimates are 34 cents in 2023 and 59 cents the following year.
• Growing active user base.
• Healthy balance sheet.

Dividend policy

The company does not pay its shareholders a dividend.

Quarterly earnings and outlook

After the market closed on March 22, the company reported record fourth quarter financial results.

Revenue came in at $38.4-million, up 131 per cent year-over-year, in-line with the consensus estimate of $39-million. Payfare reported record adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $3.6-million, up 248 per cent year-over-year, and in-line with the Street’s expectations.

This quarter was pivotal for the company with Payfare reporting a profit with earnings per share coming in at 6 cents, three cents above the consensus estimate. The company reported record free cash flow of $5.4-mllion. Return on equity stood at 23.7 per cent. The number of active user broke above the 1 million mark in the fourth quarter of 2022. At quarter-end, the company had $42-millon of cash and no debt on its balance sheet.

The following day, the share price rallied 11 per cent on high volume.

1. Management has identified several objectives for 2023 including:
2. Achieving revenue of between $185-million and $195-million, and adjusted EBITDA of between $21-million and $24-million.
3. Expanding its user base by between 25 per cent and 50 per cent.
4. Developing new products.
5. Partnering with new merchants, which will diversify its customer base. Programs with Uber, Lyft, and DoorDash launched in 2016, 2019, and 2020, respectively.

Analysts’ recommendations

This small-cap stock with a market capitalization of $331-million has a unanimous buy recommendation from five analysts.

The firms providing research coverage on the company are: Canaccord Genuity, Cantor Fitzgerald, Eight Capital, Keefe Bruyette & Woods, and Raymond James.

Revised recommendations

Analysts target prices have been stable. Year-to-date, there have been no changes in target prices.

Financial forecasts

The Street is forecasting revenue of $195-million in 2023, up 50 per cent from $129.9-million reported in 2022, rising to $254-million in 2024. The consensus EBITDA estimates are $24-million in 2023, up from a record $4.4-million reported in 2022, and increasing to $38-million in 2024. The consensus earnings per share estimates are 34 cents in 2023 and 59 cents the following year.

Earnings forecasts for 2023 have increased in recent months. Three months ago, the 2023 consensus revenue, EBITDA, and earnings per share estimates were $179-million, $23-million, and 30 cents, respectively.

Valuation

According to Refinitiv, the stock is trading at an enterprise value-to-sales multiple of 1.2 times the 2024 consensus estimate.

The average one-year target price is $13, implying the share price may appreciate 83 per cent over the next 12 months. Individual target prices are: $9 (from Cantor Fitzgerald’s Josh Siegler), $11, $12, $16, and $17 (from Eight Capital’s Adhir Kadve).

Insider transaction activity

Year-to-date, there has not been any trading activity in the public market reported by insiders.

Chart watch

Technical analysis is challenging given that the stock has a very limited trading history. Shares of Payfare began trading on the Toronto Stock Exchange in March 2021.

During its brief trading period, the share price has been quite volatile. The initial public offering (IPO) price was $6. Just four months later, the share price climbed to over $13, closing at a record high of $13.43 on July 14, 2021. However, over the next year, the share price was firmly in a downtrend, making lower highs and lower lows. By Sept. 6, 2022, the stock price sank to a record closing low of $3.97 before it stabilized.

2023 has been a turnaround year for the stock. Last month, the share price finally rebounded back to its IPO price. Year-to-date, the share price has rallied 66 per cent, making it the fifth best performing stock out of 257 stocks in the S&P/TSX Small Cap Index.

Looking at key technical resistance and support levels, the stock is faces an initial ceiling of resistance around $8. After that, there is overhead resistance around $10. Looking at the downside, there is strong technical support around $5, near its 200-day moving average at $4.96.

This small-cap stock can be thinly traded. The three-month historical daily average trading volume is approximately 150,000 shares.

ESG Risk Rating

Looking at three ESR risk providers, Payfare is not rated by Sustainalytics, MSCI, or Bloomberg.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

This report should not be considered an investment recommendation.

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