Competition and Innovation are Taking This Company Down

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The first half of the year is now in the rear-view mirror and it has been a pretty good one for the market. The Dow and the S&P 500 have gained in the early teens and the latter enjoyed its best first half in the last 15 years. But, while the major benchmarks have advanced, there are a few stocks which investors must have regretted buying.

VeriFone Systems (NYSE: PAY) is one such stock. The so-called “global leader in secure electronic payment solutions” is seemingly falling into an endless abyss as it has failed to set its house in order. The company has been plagued by numerous issues ranging from a poor acquisition strategy to poor planning and execution, macroeconomic headwinds, and most importantly, a change in business model (requires sign-in).

As such, the stock’s massive decline of around 43% this year doesn’t come as a surprise. VeriFone has been missing estimates and issuing sorrowful guidance figures of late. The company’s growth story seems effectively over as revenue and earnings declined once again in the previous quarter from the year-ago period. Now, for a company plying its trade in the electronic payments industry, this is unacceptable.

Elbowed out

VeriFone has been trying to turn itself around, but things seem pretty difficult from here. The company is presently headed by an interim CEO after former CEO Douglas Bergeron stepped down in March. Revenue across various geographies declined in the previous quarter and this does not make for good reading. VeriFone’s competitors, such as Ingenico (NASDAQOTH: INGIY.PK), have made life difficult for it and seem to have pushed it into a corner.

VeriFone understands that lack of innovation has hurt it, and the fact that it strayed from its proven model of selling hardware to a monthly subscription model hasn’t done any good either. While this has had a terrible impact on the company’s financial performance, competitors have moved in and it would be difficult for VeriFone to move into markets where players like Ingenico have established a hold.

For instance, Ingenico will be rolling out contactless payment terminals in Mexico for Banco Nacional de México (Banamex) in the country. Banamex plans to deploy this system to around 30,000 retailers which will allow the 1 million contactless cards which were issued recently to be used with them.

Now, this is certainly a massive boost for Ingenico. But at the same time, this is a big loss for VeriFone as it was among the technology providers who were tried out for the project and finally lost out to its competitor. Moreover, when you consider that VeriFone had its D.C. Taxi smart meter contract overturned as the Taxicab Commission decided that it’ll allow multiple vendors to install credit card readers, taking exclusivity away from VeriFone, question marks might be raised over the company’s future.

Lack of R&D could be fatal

Moreover, there is further threat from the likes of PayPal from eBay (NASDAQ: EBAY). eBay has been taking PayPal to retail stores and it had entered into a partnership with Ingenico last year to enable in-store payments. Consumers would be able to make payments via a PayPal card or mobile. It should also be noted that PayPal has a similar deal in place with VeriFone as well.

Now, as fellow blogger Salvatore "Sam" Mattera had pointed out eBay might disrupt the space, and I think that it could even eliminate the need for terminals in the future once it establishes its presence in stores. Since PayPal’s in-store payment system doesn’t require an NFC device, the company is well-capable of pulling a fast one on the likes of VeriFone.

The advent of mobile payment solutions are a threat to VeriFone’s business, and given the fact that the company has failed to focus on research and development has made life further difficult. VeriFone accepts the fact that a failure in R&D led to a loss of market share as customers switched to competitors.

While the company is now looking to fix that, I doubt whether a customer who has bought a different device will switch back considering the logistical challenges of switching every now and then. Failure to innovate and execute properly has also increased threats from the likes of Square as VeriFone had to shelve its own solution that was intended to compete with Square.

Stay away

VeriFone Systems has endured pretty tough times, but management did offer some positives over the previous conference call as to what they intend to do. But, such positive commentary has been a common feature over VeriFone’s earnings calls. In the end nothing has come of it. Increasing competition and a rising threat of disruption from newer technology coupled with VeriFone’s own failure to move fast has doomed the company.

Moreover, despite the stock having crashed significantly this year it still trades at 100 times earnings, which is too much to pay for a company with declining revenue and earnings, and that too in an industry with potential to grow. In comparison, competitor Ingenico has an acceptable trailing P/E of 28 times and has growing revenue. Thus, it’s best to stay away from VeriFone even though the stock might be trading near its 52-week low.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. 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!

blog comments powered by Disqus