With the advent of emerging technologies such as contactless mobile payments, it’s clear that the payment landscape is on the verge of a major secular shift. Given the increasingly evident movement to the usage of smartphones as a gateway to do virtually anything from checking in to a flight at the airport to redeeming coupons to buying coffee at Starbucks, without a doubt there will be winning and losing companies.
Although the movement of the payments industry has intrigued investors for several years now, given the fact that private competitors such as Square have entered the space and threatened the dominance of global leaders such as VeriFone Systems Inc (NYSE:PAY), Ingenico (NASDAQOTH:INGIY), and NCR Corporation (NYSE:NCR), it remains difficult to pinpoint when the payments industry as a whole is best poised to profit. However, one should keep in mind that the payments industry is a sleeping giant; indeed, this sub-sector of technology is slow-moving, but one particular dominant player’s stock price has recently been hit, presenting a unique buying opportunity for those who are willing to ignore the short term and dig into the company’s fundamentals and long-term opportunities.
Verifone Overview & Competition
VeriFone Systems Inc (NYSE:PAY) is a California-based global provider of point-of-sale hardware and related services, such as encryption software and certified payment software. With a $2.53 billion market cap and over 50% of revenues coming from outside the United States (approximately 43% from emerging markets), VeriFone Systems Inc (NYSE:PAY) allows retailers, financial institutions, taxi cabs, payment processors, gas pumps, and other merchandisers to accept a platitude of payment methods, such as signature and PIN debit cards, credit cards, RFID (contactless radio frequency identification), smart cards, pre-paid cards, electronic bill payments, check authorization and conversion, signature capture and EBT (electronic benefits transfer) cards. Given the fact that we are in the midst of a major payment landscape transition to contactless, and because the payments sector in general is underappreciated and undervalued, in addition to recent events surrounding the company, VeriFone is in a unique position to capture market share over the next few years.
VeriFone currently has approximately 20 million point-of-sale terminals installed in over 120 countries. Further, they boast nearly 70% of market share in the United States, with a presence in 163 of the 200 biggest retailers. With regard to VeriFone’s competition, the only one with similar scale and presence is Ingenico SA, a point-of-sale player headquartered in Neuilly-sur-Seine, France – VeriFone and Ingenico are the only two pure plays in the POS space. VeriFone Systems Inc (NYSE:PAY) also competes to a lesser degree with Global Payments, Fiserv, and MICROS, and other payment innovators such as eBay Inc (NASDAQ:EBAY)’s PayPal and Google Inc (NASDAQ:GOOG) Wallet, a virtual wallet that allows consumers to pay from their mobile devices.
One of the key reasons that VeriFone is poised to profit from the shift in the payment landscape is the fact that the majority of their payment terminals are equipped to handle new payment mechanisms such as NFC (near-field communications). In addition, with their deep saturation into brick-and-mortar retailers both domestically and abroad, it is likely that VeriFone Systems Inc (NYSE:PAY) will remain entrenched as a dominant point-of-sale (and by relation, payments) company for the next decade. Due to the costly nature of replacing payment systems, and the customer relationships VeriFone has cultivated over the past several decades, replacing incumbent hardware is cumbersome for most. VeriFone Systems Inc (NYSE:PAY) has also intelligently diversified its product offering, with no single product or service as a dominating revenue source.
In addition, while in technologically progressive countries the payments landscape is evolving, one must not forget that POS systems in general still represent a vastly underpenetrated market in emerging economies. According to recent management commentary, in China, India, and Russia for every 1,000 people there are only 5 POS terminals, whereby it’s 35 in the United States.