Description

We are long shares of Paymentus (NASDAQ: PAY).  As quick background, PAY is a “Rule of 50” Company that sells bill pay software to billing entities such as utilities and financial services companies (e.g. cell phone companies, insurance companies).  Their software helps customers improve bill pay conversion, increase the percentage of customers paying via auto-pay, reduce inbound call volume (where one customer call can cut that customer’s annual profit for the utility), improve reporting, and increase customer satisfaction.   

Why the opportunity?

PAY shares have sold-off significantly on the back of general market weakness.  However, we see PAY as the baby thrown out with the bathwater given PAY is exposed to consumer bill payments that are non-discretionary and has great visibility into future revenue given the high predictability of bill payments.  Additionally, in a more challenged economic environment, the ability for PAY’s software to enhance bill pay collection becomes even more important.  PAY’s software also has low implementation costs and is sticky with a net revenue retention of 115-120%.  One of the reasons for the stickiness is because many of PAY’s customers do not want to know their own customer’s payment information as it creates extra cyber-security risks.  They would rather have PAY deal with securing this data and constantly making sure it is accurate.  These cyber risks are only elevated with Russia’s invasion of Ukraine.  PAY is just 30%+ penetrated with its existing customer base and is only 2% penetrated in the $16B overall domestic bill payments market.  The market is highly fragmented with many billers continuing with legacy solutions.     

Why now?

We believe margins are set to significantly inflect and consensus expectations are too low.  We see the March quarter as the low point for EBITDA margins for the Company as headcount investments are now complete, acquisitions now integrated, and they continue gaining operating leverage.  For example, the company recently alluded to the potential for EBITDA margins of 20% next year at the JP Morgan conference, while the street is only at 16%.   

Summary / Valuation

With a durable 30%+ revenue profile, EBITDA margins inflecting back toward 20%+, a highly predictable and non-discretionary revenue stream, $160M net cash, and an excellent management team, we see PAY as one of the more compelling opportunities in the FinTech and Payments space.  

Given the durability and visibility of revenue for PAY, we value PAY on 2025 #’s.  We apply a 6.5x revenue multiple, 8x gross profit and 25x Adj EBITDA yielding a year-end 2024 target price of $27, representing over 80% upside, a 28% IRR from today.

Catalyst

Upcoming earnings after the close on Wednesday where we see a beat and raise along with positive commentary on margins through the year and 2023.