Paying It Forward via Mobile
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Editor's Note: The initial version stated Billionaire Paul Singer's Elliott Management has the largest position in the stock, this is incorrect and has been corrected. Motley Fool apologizes for the error.
VeriFone (NYSE: PAY) was down as much as 25% last week after the payment solutions company reported a fiscal 2Q net loss of $0.54 per share compared to income of $0.03 per share for the year-ago quarter. This isn't VeriFone's first fall off the wagon this year, and it might not be the last. It appears that VeriFone's old school point-of-sale (POS) terminals are being left in the dust by the move to mobile payments.
Back in February, the company announced 1Q performance that resulted in a similar punishing of the stock, and after the recent pullback the stock is now down more than 40% year-to-date.
VeriFone provides solutions and services for the financial, retail, hospitality, petroleum, transportation, government, and healthcare markets. Its system solutions consist of POS electronic payment devices. Up until a couple of years ago, in just about every store, whether it be retail or a convenience store, the terminal used to swipe your credit card was probably from VeriFone; however, this isn't the case anymore.
What the chart above really tells me is that the move to mobile payments is real. VeriFone is seeing competitive pressure for its POS systems from all sides, which includes evolving alternative and mobile payment methods being offered by Google, eBay (NASDAQ: EBAY)'s PayPal, Groupon, Isis, Visa (NYSE: V), MasterCard (NYSE: MA) and American Express.
What's more is that VeriFone decided to abandon its Square-like mobile payment device/system, noting that Sail never attracted big user numbers, which is why the product never made money. VeriFone now hopes to focus on providing mobile payments to small merchants via an indirect channel.
There are some positives for VeriFone, which include investing in the U.S. by acquiring a $5 million tablet-based software business, and the company has also invested significantly in taxi systems and media systems. The conventional POS system has yet to be heavily disrupted in the petroleum and tax business, where VeriFone is still performing strongly. But I believe it's only a matter of time before innovation comes knocking on these industries' door.
Move to mobile
The move toward mobile payments appears to be real. Part of this is that people don't like carrying wallets. In a Wakefield Research study, some 83% of respondents said they would ditch their wallets if possible.
PayPal has been a pioneer in this area and recently announced a "cash for registers" program that will allow businesses to trade in their registers for an iPad-based PayPal Here solution, allowing businesses to accept credit cards, debit cards, checks and PayPal payments. The system also uses a wireless network to connect to a cash drawer and printer.
MasterCard, meanwhile, has its MasterPass service, an app that will allow customers to pay for goods without approaching a cashier, but instead by scanning a bar code and creating a digital receipt on their phone as they exit the store. A roll-out in the U.S. expected in late spring.
A couple of participating retailers and airlines include Argos and American Airlines. MasterCard is also looking to increase card and mobile payments in cash-dominated countries. MasterCard has a partnership with TIM, the second-largest mobile network operator in Brazil, for launching a mobile-money program for its subscribers.
These new initiatives are expected to help MasterCard meet the expected revenue growth of 10% in 2013 and 2014. As well, the payment-processing company has a strong balance sheet and with high profitability.
Visa plans on launching its own digital wallet service soon, V.me. While eBay's PayPal recently launched a new European version of its mobile payments service that will run on iOS and Android.
Visa saw global credit and debit purchase volumes grow by 4% year-over-year in the March quarter. Analysts expect revenue to increase 12% in fiscal 2013 and 10% in 2014. Driving this growth, as you might expect, will be the push to mobile payments. Some of Visa's other initiatives includes expanding its prepaid card and money transfer offerings.
eBay is another great way to play the mobile payments sector. In part because it has one of the leading companies, PayPal. But also because of the inherent diversification the company provides, unlike VeriFone or Visa, which are heavily tied to payments. eBay is both a payments and an e-commerce company.
eBay is expected to see revenue up 15% in both 2013 and 2014, with modest gains in its marketplace segment (ebay.com), but mainly driven by the payments segment. Its payments segment includes PayPal and Bill Me Later. eBay's marketplace segment is the leader in online auctions.
Hedge fund trade
Going into 2Q, there were a total of only 19 hedge funds long VeriFone, a 12% increase form one quarter earlier.
Meanwhile, the likes of Visa and MasterCard command much more interest. Visa had 88 hedge funds long the stock at the end of 1Q, a change of 9% from one quarter earlier. This includes John Scully's SPO Advisory with the the most valuable position, worth close to $842 million, accounting for 11.4% of its total 13F portfolio (see SPO's top stocks).
Going into 2013, 68 hedge funds were long MasterCard. Tom Russo's Gardner Russo & Gardner had the biggest position in the stock, worth close to $510 million and accounting for 6% of its total 13F portfolio (check out what Gardner has been buying).
Although VeriFone has managed to grow EPS an annualized 45% over the last five years, the future isn't so bright; analysts expect the company to grow EPS at an annualized 13% over the next five years, whereas Visa is expected to grow at 18.5% and MasterCard 17.6%.
VeriFone has been hammered over the past 12 months, down more than 50%. I think there could be further pressure for this stock give the rapid innovation taking place in its industry, which includes the decreasing demand for conventional POS terminal devices. Meanwhile, PayPal is one of the leaders in the industry, and by investing in eBay investors can gain access to the payments market and the e-commerce market.
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends eBay, MasterCard, and Visa. The Motley Fool owns shares of eBay and MasterCard. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!