SELL Payfare Inc? (TSE:PAY)

DoorDash is not renewing and makes up a large portion of Payfare's revenue

Price when originally posted (TSE: PAY): $6.62 CAD
Current price (TSE:PAY): $8.35 CAD
Current market cap (TSE: PAY): $317.41M CAD

Disclosure: As of today approximately 7% of my portfolio is in Payfare and my full public portfolio with buy and sell activity can be viewed here: Google Sheets link

The investment case for Payfare Inc was short-lived as the following material news released after hours on Payfare today: https://www.newswire.ca/news-releases/payfare-and-doordash-to-not-renew-agreement-832185782.html

TORONTO, Sept. 26, 2024 /CNW/ - Payfare Inc. (TSX: PAY) (OTCQX: PYFRF), a leading international Earned Wage Access ("EWA") company powering instant access to earnings and digital banking solutions for workforces, today announced that its core services agreement related to DoorDash, Inc.'s DasherDirect card program will not be renewed beyond the current term in early 2025.

DasherDirect is currently Payfare's largest program, and the revenue derived from the program has been a substantial proportion of Payfare's total revenues. As such, Payfare is withdrawing its previously issued 2024 financial guidance for revenue and earnings, as the Company and DoorDash establish a transition plan to begin in the fourth quarter of 2024. Both parties are expected to work collaboratively during the remainder of the term.

Payfare has over $100 million in cash, cash equivalents, and guaranteed investment certificates and is well capitalized to fund its new strategic initiatives.

Payfare continues to see high growth with its other client programs and is working on securing new, large-scale EWA programs in both the gig economy and employee verticals. The Company believes the aggregate Gross Dollar Value ("GDV") from these opportunities could mitigate the impact of the DoorDash non-renewal.

Board of Directors Update

Following receipt of his resignation to be effective on September 26, 2024, Mr. Hugo Chan will no longer serve as a director of the Company. Mr. Chan, who has served on the Board during the prior two years has since moved to become a resident in Asia and has resigned for personal reasons. The Company thanks Mr. Chan for his expertise and support over the years.

After Lyft and Payfare announced a “long-term extension” of their agreement 2 months ago, now DoorDash has announced they are not renewing with Payfare and their contract expires in early 2025. This is a big deal because DoorDash is Payfare’s largest customer and is responsible for a substantial portion (most?) of their revenue.

They mention that growth in other programs (Uber, Lyft, and ADP?) could mitigate the impact of the non-renewal, but even if that’s true I think it will take a long time before Payfare recoups the lost revenue and returns to growth.

Losing a big customer was the first big risk I called out in the original post, but I obviously didn't think it would happen so soon. I also mentioned in the same post that “There is also some hair, like with a lot of small caps, and I can justify the risks all I want but there is real downside here.”

This is just me “softening the blow” by noting that I called out the potential of them losing a big customer, in the end I allocated 7% of my capital to Payfare, making it one of my largest positions.

Customer concentration risk is something we consider with every investment, it won’t always bite you, but sometimes it will. Customer concentration is a risk I face with TSSI as well (currently my largest position and up 4X). I thought the upside in Payfare’s case outweighed the risk of them losing their biggest customer (positive EV) and whether my calculations were right or not, just because the risk came to fruition I can't judge my decision based on the result.

This situation also highlights the importance of portfolio diversification as since I kept the position to 7%, even if it falls in half tomorrow (or goes to 0) I would still be up over 50% year-to-date; nevertheless, it will be a setback.

I’m not sure what the price will do tomorrow or what I will do tomorrow, I lean towards selling, but it may depend on the price action. I am guessing there will be an over-swing to the downside as investors rush for the exits, but I may still want to cut my losses and reinvest elsewhere instead of waiting for them to replace DoorDash’s revenue and return to growth (not to mention the possibility of them losing another big customer). I do believe in their other programs and think the recently released Uber Canada card is doing well, but not enough to offset the losses in DoorDash and there is now a lot more uncertainty surrounding the company now.

I will post in my Substack chatroom within a day if I do end up selling. (Update Sept 30/24: I’ve decided to keep my shares; see the chatroom for full details.)

It doesn’t look like there will be a great outcome with Payfare, but we can only hope to be right 3 out of 5 times (60%). The asymmetry of investing, where you can only lose up to 100%, but can gain multiples of invested capital, allows us the chance to only hit 60% of the time and have a few winners drive portfolio returns.

Disclosure: As of September 26th, I am a shareholder of Payfare Inc at an average cost base of $6.28. I may have sold my position by the time you’re reading this. This is not a purchase recommendation and I can only hope that I’m right on 3 out of 5 (60%) investments I make — this could be one I’m wrong on. Please do your own research and double-check my data & findings. Please also read my disclaimer and process here: Curious Investing Disclaimer and Process