A reader asked, after my most recent piece on mobile payments, who besides the processors might be on his investment radar screen.
The answer: Verifone (PAY).
Today may not be your day to buy. They popped, following a Goldman Sachs upgrade. They're up almost 50% so far this year, but they were also higher than current levels less than a year ago. But you want to put this on your radar screen.
Next time you pay with a credit card at a small merchant, look down at the device they're swiping your credit card through. Chances are it's from Verifone. They've been in this business for decades. They're tight with Visa, Mastercard, all the processors and all the banks. Thanks to those little boxes.
But what are they doing for you lately? Mobile payments are making them "the perfect stock," according to The Motley Fool, with their Payware Connect gateway having a $10 billion run rate in transactions, their purchase of European gateway provider Point, and its plans to invest $1 billion a year in the business.
Right now, you're paying a 22 PE for a company that grew 30% last year, one that in good times can bring $1 of each $10 to operating earnings. A $1billion/year investment sounds aggressive when you have a market cap of barely $5.5 billion and about $650 million in cash, but it's do-able.
And now would be the time to spend.
Think of what PAY is doing right now is moving from the PC to the cloud. More precisely, it's the service side of the business. A terminal includes software that can move card and merchant data to a processor, and a gateway does much the same thing. But instead of this being a hardware sales you have a services sale - you're getting a taste of the transaction.
It's not a big taste, but you don't need a big taste. One veteran of the business told me how her computer programs earned just two cents each time they ran, but they could run hundreds of times each second, 24 hours a day 7 days a week. It adds up.
Verifone will be tested by its new TV taxi service - early reports on the most recent card network break-in implicated the cab network. But it is a teasing look into where all this can go, combining marketing, sales and processing for captive customers, of which the world has many.
One reason to be bearish on Verifone is its insistence that Near Field Communications, or NFC, the wireless networking system Google seems to be walking away from, represents the future of the business. How many phones and carriers will support NFC remains up in the air.
Frankly the answer to that is less important than it appears. With Verifone you know that whoever wins the mobile payment game they will have to be involved. They are the payment interface the current players trust, the one they have a history with, the one they won't leave behind readily.
And one they won't have to leave.