Down 18% last week, is now the time to buy this ASX tech share?

After crashing 18% lower last week, does the EML Payments Ltd (ASX: EML) share price present a buying opportunity for long-term investors?

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The EML Payments Ltd (ASX: EML) share price crashed 18% lower last week after the S&P/ASX 200 Index (INDEXASX: XJO) tech share released its 1H20 results.

EML wasn't down in the dumps alone, as the ASX tech sector was no stranger to sell-offs last week. Altium Limited (ASX: ALU) and WiseTech Global Ltd (ASX: WTC) released results of their own and tumbled 18% and 35%, respectively. These drops were primarily related to the effects of the coronavirus outbreak, however, EML's dive appears to have been fuelled by something else.

So, what was the market reacting to and does this recent sell-off present a buying opportunity for long-term investors?

About EML Payments

EML Payments is a financial services company that specialises in issuing and managing prepaid stored value products. These products range from reloadable cards through to traditional, single-store gift cards. You can read this article here for a primer on EML's business.

What did EML report?

Last Wednesday, EML released its half-year FY20 report. Despite the negative market reaction, EML's latest batch of results actually seem fairly solid.

Gross debit volume (GDV), which reflects the dollar value of card transactions processed by EML, increased 62% on the prior corresponding period (pcp) to $6.62 billion. This translated to $59.2 million of revenue, up 25% on the pcp, while earnings before interest, tax, depreciation and amortisation (EBITDA) came in 42% higher at $13.9 million.

Importantly, EML's gross profit margin increased 2.7% on the pcp to 75.7%, with all 3 of its business segments increasing their gross profit contribution during the period.

Management even slightly upgraded its FY20 guidance for net profit after tax excluding acquisition-related costs (NPATA) from $26.2–$29.4 million to a new range of $27.5–$30.5 million.

However, what really matters during ASX reporting season is whether or not a company's results meet the expectations of the market. With the EML share price having run up 260% in the last 12 months (and 23% this year at the time of reporting), expectations were certainly high.

Perhaps the market had priced in a more notable upgrade in FY20 guidance. Or perhaps investors were severely punishing the shares due to the possible delay in regulatory approval of EML's acquisition of Prepaid Financial Services (PFS).

In any case, this set of results wasn't enough to satisfy the lofty expectations of the market, sending EML shares tumbling 13% on the day.

Negative research report

After being punished on Wednesday, the EML share price trended slightly downwards on Thursday before experiencing some peculiar price action on Friday.

After opening at $4.80, EML shares dropped as much as 14% to $4.13 before closing at $4.63, a mere 2.53% down.

This wild swing appeared to be the result of a negative research report that was doing the rounds on Friday. It's suggested that the report questioned EML's calculation of EBITDA, drawing particular attention to share-based payments and foreign exchange.

However, the research firm later retracted the report, sending the EML share price climbing back up again.

Does this present a buying opportunity?

As I've mentioned in a previous article, EML is an exciting ASX fintech company that is highly scalable, specialises in niche verticals, and has promising tailwinds at its back.

EML's acquisition of PFS, its largest deal to date, could be a game-changer. For $423 million plus an earn-out of up to $103 million, EML will have a suite of digital banking services at its disposal, for example, the ability to offer e-wallets.

In this way, EML will gain exposure to the previously untapped banking-as-a-service sector, particularly in the rapidly emerging European neo-banking segment. What's more, the acquisition of PFS will deepen EML's European footprint as well as its presence in reloadable cards.

According to management estimates, the combined entity would have been on track to process $18.3 billion of GDV and $65 million of EBITDA in FY20.

Although the acquisition was expected to be completed in early 2020, this has now been pushed back to late Q3 or early Q4 FY20 at the latest. This was a hot topic during EML's conference call last week as brokers sought to clarify whether or not the deal had hit a snag.

However, CEO Tom Cregan did his best to allay these fears, stating there was nothing to be concerned about and that it was business as usual.

In any case, EML certainly faces a considerable task ahead in integrating PFS successfully and delivering on its vision for the combined group.

Foolish takeaway

Down a further 10% today, you're now able to purchase EML shares at a fairly steep discount compared to this time last week. However, I wouldn't classify them as cheap by any means

I think there's still a whole lot of growth and optimism priced in at current levels but if the integration of PFS is successful, EML could prove to be a great buy-to-hold investment over the long-term.

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Emerchants Limited. The Motley Fool Australia owns shares of Altium and WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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