Electronic Payments Today …
And in the Future
One of the great things about my job editing the Dick Davis Digests is that it makes it easy to see patterns and trends arising in the investing advice of the day. The hundreds of analysts and editors that we follow all have different investing philosophies, and as many viewpoints on the market. But there are distinct currents and themes running through their advice at any given time.
Most recently, I took note of a particular stock that just seemed to keep popping up. This happens sometimes when a stock is in the news, like BP, or when a sector is on a tear, like cloud computing. But this stock didn’t have any of those factors, which made its seeming omnipresence all the more interesting to me.
The stock is VeriFone Systems, symbol PAY. The company’s business doesn’t sound that exciting at first glance: It’s the leading provider of point-of-sale electronic payment technologies. That mostly means it makes and sells those little machines on store counters that allow you to swipe your credit or debit card and sign the screen or punch in a PIN number. It also makes the technology that allows you to pay for gas at the pump with a credit card. VeriFone is by far the leading provider of this technology, with the largest market share in North America, South America, Northern Europe, Russia and India, and a second-place share in Southern Europe. In China, the company is tied for first place with a local provider.
So it’s a great company. But what makes it an exciting company—and most likely what made so many advisors take an interest in it recently—is VeriFone’s future growth potential. The company is expanding rapidly on two fronts right now: by introducing new technology on one hand, and by expanding its presence in growth markets on the other. And VeriFone has already made enough progress on both these fronts that the growth was reflected in the company’s recent earnings announcement, which attracted even more attention.
Expansion into new markets is contributing most of the growth so far. In 2004, 64% of VeriFone’s business came from the U.S. In the years since then, the company has aggressively pushed its products in emerging growth markets, especially China. VeriFone’s unattended payment systems are being installed at gas stations all over China, where consumers are increasingly getting used to conveniences like paying for gas at the pump. Today, VeriFone gets as much business from emerging markets as it does from the U.S., with each segment contributing 39% of the company’s business (non-U.S. developed countries make up the rest.)
VeriFone is also developing new payment technologies. These include contactless point-of-sale systems that let customers simply wave their card over the machine to pay and the PAYware Mobile system for the iPhone.
PAYware Mobile is aimed at what the company calls “micro merchants” who want to be able to accept credit card payments but don’t need one of VeriFone’s more expensive systems. The system includes a plastic sleeve with a credit card swiping channel that slips onto the iPhone, and an Application for processing payments and capturing signatures.
Finally, VeriFone’s stock looks great; it’s traded up for five straight weeks now. That’s another thing that attracts analyst attention.
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Sticking with the subject of payment technologies, there was an article in the New York Times recently about Facebook’s new “Credits.”
Credits are a virtual currency Facebook users can spend on virtual gifts and games on the site. Introduced last year, Credits have slowly become accepted by more of the site’s applications, and recently became available in physical form at Target, as gift cards. So far users can only spend their Credits on Facebook, but the Times article speculated that Facebook may eventually try and position Credits as an alternative to PayPal, a way to pay for just about anything online.
While I don’t anticipate paying for my online purchases with Facebook Credits anytime soon—if ever—the world of electronic payments is certainly an interesting one to watch. It can be a crucible for big profits, as with PayPal, which fetched a $1.5 billion price tag when it was acquired by eBay. And before that, MasterCard (MA) and Visa (V) built empires by making it easier for consumers to pay for things. VeriFone’s growth testifies to the continuing profitability of the field.
I suspect the next great opportunity may be making it easier for consumers buy stuff on their mobile devices, and making them feel safe doing it. I don’t know of any investable opportunities in that market yet, but there are plenty of companies working on it. Two that will undoubtedly be fixtures are Apple and Google, because of the iPhone and the Android OS, respectively. Both already have secure App stores where consumers happily spend real dollars, and both would undoubtedly be interested in the revenue that a simple and secure payment system for their phones could generate.
It will be interesting to see what happens.
Wishing you success in your investing and beyond,
For Cabot Wealth Advisory
Editor’s Note: VeriFone was featured in the September 15 issue of Dick Davis Investment Digest. To learn more about it and other leading stocks, click here.