Hourglass Journal - Patience, $PAY.TO, & Tuning Out the Noise
Welcome to another week of the Hourglass Journal - including a watchlist stock I recently (about an hour prior to writing) initiated a position in. Enjoy the article!
"Don’t let others convince you that the idea is good when your gut tells you it’s bad."
Payfare - $PAY.TO
This company is my most recently initiated position - Payfare provides fintech solutions for the gig economy and helps solve one of the major issues contributing to employee attrition for gig workforces like Uber, Doordash, and Lyft (all of which are Payfare customers). By giving gig workers near-instant access to cash to cover expenses like gas and maintenance without waiting for normal bi-weekly pay periods, Payfare helps to retain employees, reduce inefficiencies, and lower overhead costs for workers.
Payfare itself has seen some seriously impressive growth while continuing to add some of the biggest gig economy players to its list of customers. With more platforms come more users utilizing Payfare-powered apps and, as a result, the amount of revenues Payfare takes from network interchange and banking related fees.
Since its early 2021 IPO, Payfare’s fundamentals have seen a complete reversal. From unprofitable and negative gross margins, the last two years have seen Payfare turn gross and net profits, post a positive EBITDA figure and capital efficiency metrics (5.2% ROIC and 19.6% ROE), and begin a share buyback program (to combat fairly minimal SBC), all while still growing revenues at more than 63% on a TTM basis.
The company’s growth is entirely fueled by its own internally generated cash flow ($18.8m over trailing twelve months, $56m cash position) and doesn’t hold any debt on the balance sheet. Meanwhile, larger tailwinds to the gig economy and the number of workers in gig jobs help to provide organic growth for Payfare. Along with expanded partnerships with Visa to provide cards, continued development of new apps and banking solutions for gig workers, and signing on additional platforms as customers, the growth phase is far from over.
Despite the improving fundamentals, Payfare’s status as a Canadian microcap (~$350m CAD) has kept its valuation low, with an enterprise value approximately 1.5x revenues and a P/E of 29x. Some back of the envelope math shows this valuation offers a pretty enticing entry point relative to the company’s growth:
Over a 5-yr holding period (through to 2029):
I assume a revenue CAGR of 40% as larger industry tailwinds continue to provide organic growth and Payfare’s value proposition improves.
I assume multiple expansion from 1.5x EV/sales and 29x earnings to 2.5x sales and 30x earnings as awareness for the company grows and it grows from a microcap to a smallcap with more institutional interest.
Net income margins continue to expand and reach 12.5% by 2029.
The company continues to buyback shares to mitigate shareholder dilution, resulting in only a 1% CAGR in total shares (46.6m shares outstanding → 49m by 2029).
By 2029, the company would be making $940m in revenues. With a 12.5% net income margin, the company nets ~$118m ($2.4 EPS). The company’s share price would be approximately $72/share - giving it 10-bagger potential over the coming half decade.
Now maybe this figure seems a bit optimistic, but even running the same process at half the revenue CAGR (20%) and only an 8% net income margin puts Payfare’s share price at ~$21, which would still offer a phenomenal 25% CAGR for the next 5 years.
Furthermore, I think Payfare’s picks-and-shovels approach to an industry with tailwinds and huge growth potential warrants a more optimistic model - particularly in light of the impressive growth it’s seen over just the last two years.
Despite significant improvement since IPO, Payfare’s stock doesn’t seem to have caught up with the underlying fundamentals. As such, I think it offers some pretty significant growth potential for investors with an appetite for risk and a stomach for the volatility associated with microcaps. I believe patience with this name will pay dividends over the coming years as the value prop improves, the industry grows, and Payfare cements itself as the leading provider of gig economy fintech solutions.
Active Patience - Ian Cassel from the MicroCapClub
This isn’t a stock pitch or company deep dive or any of the usual stuff I shout out for the investor spotlight sections, but it’s no less deserving of a shoutout. I can’t recommend this piece enough - Ian Cassel talks finding, maintaining, and committing to principles in this succinct (but no less amazing) article.
I particularly recommend this for beginner investors, but it’s also a great reminder for investing veterans on the role of principles in creating investment strategies and sticking to them to find success relative to your goals. Cassel even throws in a few golf quotes, just to put a cherry on top of the whole thing.
You can check out Active Patience by Ian Cassel from the MicroCapClub here.
Noise vs. Knowledge
One of the beautiful parts of investing is that it can really benefit the lazy.
Don’t get me wrong - there’s work involved. Lots of it. The learning potential is infinite, and the sphere of knowledge is limitless. You can fill endless amounts of time learning about individual companies, industries, investing nuances, etc etc. The list goes on.
But learning and doing are two different things, in this case. Investors can work on improving their knowledge base while making 1 or 2 decisions in a year. And typically, these investors are going to perform much, much better than those who are constantly buying, selling, changing their minds.
Investors who are able to stay steady and allow the magic of compounding to take effect without letting their emotions get the better of them almost always outperform investors that are, in effect, DIY traders. And a large part of not letting emotions get the better of us, as investors, comes down to tuning out the noise.
What do I mean by this? To me, ‘the noise’ is the sheer amount of BS that’s put forward by the finance industry as a whole. To my mind, the vast majority of this is nothing more than people who get paid a little too much trying to justify their salary.
Let me be more exact with what I consider ‘noise’:
Anything from Jim Cramer’s mouth
These are all short-term oriented opinions or events that are firmly against my own investing philosophy, and made by people that have no knowledge of or concern for my personal goals for investing. This all being said, there’s lots to learn from the true experts in the field (and it’s important to pay attention to these resources, either for overall investing knowledge or to turn over some new rocks). Here are the things that I do take into account:
Deep dive research - especially from investors who have no motive to sell me anything
Essays from experts - for example, Michael Mauboussin
Shareholder letters from some of the greats - Jeff Bezos, Buffett, etc.
Industry insiders - this is an especially important one.
As investors, we sometimes get into companies making products we ourselves would never use, which can give us a skewed vision of a business. For example, Unity Software was a former investment of mine that I recently sold after having a great chat with a game developer. He had no experience investing and wasn’t interested in it at all, but he had the perfect perspective on why Unity didn’t have the place in the gaming industry that I thought it did. After he completely obliterated my investment thesis, I sold. These perspectives are invaluable.
Quarterly reports - just to keep up with my companies and ensure the investment thesis is still on track / that the underlying business hasn’t shifted.
Some investors I know like to keep up with what’s going on in the markets, fed decisions, analyst opinions, etc., but don’t incorporate it into their investment decisions - this may work for certain investors who simply like keeping up with the times (totally fair!), but many others that are subconsciously impacted by the news they take in and, despite saying otherwise, make decisions based on these factors. For myself, this is simply adding unnecessary work that may influence my investment strategy negatively - so I don’t do it.
Investing can reward the lazy. I have actively chosen to do less by avoiding ‘noise’ in the finance industry, and I believe my overall investment performance has positively benefitted by this decision. It also frees up my time so that I can put it into more beneficial directions. As always, this investing “tidbit” isn’t for everyone. But it’s what I’ve found to work for me.
That’s all for this week folks - I hope you enjoyed the article, and I’ll see you back next week with another journal issue. Happy investing!