Why has the EML share price rebounded 30% in 2 days?

New investors could have spotted an undervalued opportunity in EML.

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Key points

  • It's been an eventful week so far for the EML share price, plunging 36% on Monday and recovering 31% on Tuesday 
  • It followed news of further regulatory concerns, this time with its UK subsidiary, after prolonged issues with Irish regulators
  • However, some of EML's valuation ratios present an exceptional buying opportunity on paper

The EML Payments Ltd (ASX: EML) share price has been on a wild ride over the past few days.

Shares of the payment solutions provider dropped 35.71% on Monday, and then bounced back 30.86% the day after.

At the time of writing, the company's shares are 0.94% lower and currently trade for 52.5 cents each.

To make sense of why EML's shares plunged and then rebounded so strongly, let's cover some events that unfolded.

What's going on with the EML share price?

On Monday, EML said it would temporarily halt the onboarding of new users of its UK subsidiary as it contended with regulatory concerns.

The halt affected new customers, agents, and distributors of its subsidiary Prepaid Financial Services Ltd.

In its market announcement on Monday, EML said the delay was estimated to reduce group revenue by "less than $5 million" in FY23.

The company said the concerns of the UK's Financial Conduct Authority (FCA) were "similar to those raised by the Central Bank of Ireland" with its Irish subsidiary, PFS Card Services.

Irish authorities questioned the company's anti-money laundering credentials in May 2021. EML's Irish subsidiary undertook a substantial remediation program but, in July, the Central Bank of Ireland found there were still gaps.

EML said it was "currently undertaking a remediation program" to address ongoing Irish concerns.

It seems another regulatory issue may have spooked investors, leading to an enormous red candle for the day on Monday with EML shares trading at record volume levels.

So why are EML's shares back on the upswing?

There's no news from the company to piece together why the stock rebounded almost 31% a day later.

One theory is that as older investors left in droves, new ones spotted an opportunity to pick up a piece of a potentially undervalued company, thus causing its share price to recover.

And when looking solely at EML's valuation ratios, a case could be made that there is further upside in store. For instance, the company's price-to-sales (P/S) ratio currently stands at 0.8. This means it costs around 80 cents to buy one unit of the company's sales.

This is significant because, all else being equal, a share with a P/S ratio of one to two is good, while a share with a P/S ratio of less than one is extraordinary.

The other interpretation of this ratio though is that investors may not be feeling confident in the company's long-term prospects. This, in turn, enables units of revenue to be bought at bargain prices due to their perceived riskiness.

Whatever the case, the market has certainly found an equilibrium for the EML share price and the negative events that have transpired.

EML share price snapshot

The EML share price is down 83.6% year to date. By comparison, the S&P/ASX 200 Index (ASX: XJO) is down around 6% over the same period.

The company has a current market capitalisation of approximately $198 million.

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Motley Fool contributor Matthew Farley has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended EML Payments. The Motley Fool Australia has positions in and has recommended EML Payments. 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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