The Motley Fool

This growth stock has 25%+ upside

Digital payment specialist Paysafe (LSE: PAYS) has released a positive trading update. It shows that the company is trading in line with expectations and is on track to meet its guidance for the full year. But despite this, its shares have fallen by 2% today. Should you buy? Well, they offer a wide margin of safety and as such, a 25% capital gain is very much on the cards.

Paysafe upgraded its guidance in August and it expects revenue to be in the range of $970m-$990m for the full year. Assuming an adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) margin of 29.6%, its adjusted EBITDA is due to be anything from $287m to $293m. As well as delivering on its guidance, Paysafe is also focused on further expanding its payments business and enhancing its core technology platform. This should provide the company with further growth opportunities over the medium-to-long term.

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Clearly, digital payments are becoming increasingly popular as consumers demand more convenient and accessible services. This trend looks set to continue over the coming years and while digital payments have become more prevalent across the globe in of late, there’s still considerable potential for increased take-up across both the developed and developing world.

Despite the potential of the wider industry, Paysafe continues to trade on a reasonable valuation. It’s forecast to increase its bottom line by 14% in the next financial year and yet has a price-to-earnings (P/E) ratio of only 13.6. This means that Paysafe trades on a price-to-earnings growth (PEG) ratio of less than 1, which indicates that it has at least 25% upside potential over the medium term.

And the competition?

Of course, the digital payments space is highly competitive and one company that has struggled to turn a profit given this backdrop is Monitise (LSE: MONI). For example, in the last financial year Monitise recorded a pre-tax loss of £243m. Although it’s expected to narrow its losses in the current year, Monitise’s pre-tax loss is still expected to be £16m.

Certainly, over the long term Monitise has the potential to turn its financial performance around. However, it has struggled to turn a profit even though its product has proved popular and it has been able to win blue chip clients. Therefore, sticking with an already profitable company such as Paysafe is a lower risk option.

This doesn’t mean that Paysafe offers any less of a potential reward than Monitise. In fact, Paysafe operates in over 200 countries and therefore has the potential to capitalise on faster growing economies within the emerging world. It also means that Paysafe is relatively well diversified and this improves its risk/reward ratio yet further.

As such, Paysafe seems to be a sound buy at the present time, with its business model, operating environment, valuation and near term performance indicating that a gain of 25% is well within its reach.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.