Paymentus: Robust Business With Secular Catalyst (NYSE:PAY)

Paymentus (NYSE:PAY) is a company providing bill payment technology and solutions for over 2,200 billers in North America. PAY generates most of its revenues from transaction fees, and therefore benefits from the fact that it focuses on non-discretionary target verticals, such as utilities, financial services, or healthcare.

Despite the recent momentum on the stock, share performance has been lackluster since IPO in 2021 overall. The stock is currently trading at $21.4, having lost almost -30% of its value since the first debut day. PAY reached an all-time high of $35 briefly after the IPO, but it even traded as low as $8.7 towards the end of the first quarter last year. Since then, though, the stock has appreciated by a lot, delivering a 1-year return of 145%.

I rate PAY stock a buy. My 1-year price target of $23.7 presents about 14% upside from the current trading price of $20.8. I believe PAY has a solid and predictable business that is benefiting from secular catalysts.

Financial Reviews

Fundamentals are relatively decent. Revenue growth has been steady between roughly 20% – 25%, while operating cash flow (OCF) generation has also improved over the past five years. GAAP net profitability has been on a downtrend, though it saw an expansion in FY 2023. In FY 2023, PAY delivered a revenue of over $614 million, an over 23% YoY growth. Though the top-line growth decelerated from the prior year’s 25%, the slowdown has been rather soft, in my opinion.

Moreover, the profitability and OCF improvements helped offset the growth slowdown. Net margin expanded to 3.6% in FY 2023 as PAY delivered a record net profit of $22 million, further driving OCF to also see a record expansion to $68 million. Liquidity has been on a solid uptrend since IPO. PAY’s steady and improving OCF generation, alongside the $240 million of IPO proceeds, have contributed strongly to PAY’s cash level over the past five years. In FY 2023, PAY finished the year with almost $180 million of liquidity.

Catalyst

I believe PAY should continue benefiting from the growth opportunity driven by the secular shift towards online bill payments in the US. Overall, this should create a favorable demand environment for PAY’s solutions, as highlighted by the large deals secured in FY 2023. Moreover, these large clients could also indicate future revenue growth through potential increase in transaction volume.

Since 2020, the share of people that prefer the online method for bill payments has increased considerably in the US, as per a report by Financial Brand. The most significant increases occur mostly in use cases for phone, utility, internet, life insurance, and credit card bill payments, among others. More importantly, these are also some of the key non-discretionary verticals where PAY has a strong focus. Utilities, for instance, remain one of the strongest verticals for PAY as of today:

And our platform fits the bill perfectly for that. So as a result, we are growing in all different verticals. Utilities remains a strong vertical for us, but many other verticals, as I named, we are seeing traction in. So, we are very excited about the future, actually. And one of the other things which is interesting is, as we are entering into some other verticals, we are noting that it’s not just the payments in, even payment outs or disbursements and payouts becomes an important transaction flow that we could acquire or automate through our platform. So, we’re excited about that as well.

Source: Q4 earnings call.

Today, 71% of survey respondents are paying utilities online, as opposed to just 65% in 2020. In my opinion, such an increase in preference towards online methods provides an indication for not only higher demand for PAY’s offerings, but also future increase in online transaction volume. Eventually, this should benefit PAY due to its transaction-linked revenue generation model.

In my opinion, it is also simply a matter of time before a more widespread adoption of online bill payments takes place across the US. Today, a small part of people, mostly those within the low-income segments, still prefer the offline, yet costlier methods, such as cash, money order, or checks due to their unfamiliarity with online methods. As such, I would expect the lower cost online transactions to continue gaining popularity within these underserved segments going forward, likely driven by more government programs to increase financial literacy.

Risk

I believe risk to my thesis remains minimal. However, if any, there could be a likelihood for a future revenue concentration, driven by the increasing share of larger enterprise clients within PAY’s customer base. Since larger clients generally contribute to higher transaction volume, it is possible for PAY to see volume concentration within the top few clients over time, increasing PAY’s reliance on these customers and concentration risk. Nonetheless, I believe the probability of this happening in FY 2024 should be quite small.

Valuation / Pricing

My target price for PAY is driven by the following assumptions for the bull vs bear scenarios of the FY 2024 projection:

1. Bull scenario (70% probability) assumptions – I expect PAY to achieve an FY 2024 revenue of $744 million, a 21% growth, in line with the company’s guidance. I assume a forward P/S to remain at 4.3x, where it is trading today. This implies a share appreciation to $25.

2. Bear scenario (30% probability) assumptions – PAY to deliver FY 2024 revenue of $718 million, missing the low end of the revenue guidance by about $2 million. This means that PAY will expect revenue growth to decelerate below the historical 20% range. I assign PAY a forward P/S of 3.7x, assuming a sideways price action into FY 2024.

Consolidating all the information above into my model, I arrived at an FY 2024 weighted target price of $23.7 per share, projecting a potential upside of about 14%. I would rate the stock a buy.

As a side note, my assignment of 70-30 weighted probability for bull and bear scenarios is mostly due to my belief that PAY has a predictable business that is benefitting from a secular trend, meaning that it is quite likely to hit its upper end of its guidance.

Nonetheless, some of my other assumptions are still relatively conservative. For instance, I assume P/S to remain steady for the bull scenario. I also project a 2.5% increase in shares outstanding, which is a higher increase than in FY 2023. Finally, I also assume PAY to miss its guidance in the bear scenario, meaning that there is a possibility for the stock to trade lower instead of sideways.

Conclusion

In my opinion, PAY has a relatively solid and predictable business. The increasing share of online bill payments in the US into FY 2024 and beyond presents an attractive secular growth opportunity for PAY. Risk remains minimal today. Having performed reasonably well over the past year, the stock has been trading at an elevated level today. However, my 1-year price target of $23.7 suggests that there is still about 14% potential upside to realize. I rate the stock a buy.