There is an ongoing battle in the payment solutions industry that continues to rage on. New developments stoke the flames as the weeks go on. I have written previously about the emerging payment solution of near field communications (NFC), but since then there have been a few important developments in the mobile payment space.
In early August, startup mobile payment processing company Square announced a deal with Starbucks (SBUX) stating that in the fall, Square would being processing all of the credit and debit card transactions in Starbucks stores in the United States. This news got a lot of press earlier this month, and rightly so, it is a new, cool, innovative technology that has made mobile payment processing available to almost anyone. The fact that this technology is getting some exposure from a retailer like Starbucks is validation that there is a continued shift towards a new type of transaction that will include the mobile phone.
Another recent development was the announcement that eBay's (EBAY) PayPal will be partnering with VeriFone (PAY) to offer a payment solution in VeriFone's current retailers, which happen to be 80% of the top 200 retailers in the United States. These transactions will utilize the existing VeriFone terminals in retail locations to link up to consumers' PayPal accounts.
Additionally, a consortium of retailers have banded together to develop their own mobile payment network called the Merchant Customer Exchange (MCX). This network includes merchants such as Wal-Mart (WMT), Best Buy (BBY), Sears (SHLD) and Target (TGT). This new collaboration is intended to compete against existing collaborative groups such as ISIS, and the existing Google Wallet network.
Most recently, stories have been emerging claiming that a near field communications chip (NFC Chip) will be included in the new iPhone. It is likely that this chip will be manufactured by NFC chip manufacturer NXP Semiconductors (NXPI). NXP Semi claims to have Intel- (INTC) like market share of the NFC chip market with over 200 design wins in the mobile phone market. However, keep in mind that NXPI isn't the only company producing NFC chips.
So what does this all mean? Retailers, payment processors, hardware manufactures, and innovative startup companies all see the writing on the wall that current mobile technology along with budding consumer demand, leave the door open for a new type of consumer payment experience. Other than personal opinion, there is no way to choose a "clear winner" from this coming shift. The best we can do is use our deductive reasoning skills to make assumptions about which of the above companies provide the best value opportunity as well as the greatest amount of exposure to this market.
I am of the belief that the back-end hardware manufacturers (NXPI, PAY) will be the immediate winners in this race followed by the software that is adopted first (Square, GOOG, AAPL). People will argue that the processors, Discover Financial (DFS), Visa (V), American Express (AXP), and Mastercard (MA), will be the ultimate winner, but my argument is that no new transactions will be created from this shift in payments therefore no "new revenue" will be created for the processors in this shift.
In my prior article relating to this topic I stated that I believe NXP Semi and VeriFone will be the winners in this shift. I would like to address the recent news on Square, Paypal, and Apple in relation to my thesis.
As investors we never know what developments will unfold in an industry, or company, or a company's competitor that will act as a catalyst (positive or negative). It is our job to compile what information is available in the marketplace today, derive conclusions, and initiate positions based on our personal opinions/assumptions. In regards to the current mobile payment environment here are what I believe to be the pertinent facts about adoption and implementation that make VeriFone the highest probability investment in this area:
- We have seen validation that "mobile payments" are a trend that companies want exposure to. Examples: Google Wallet, ISIS, new retail consortium, Paypal, Square's new pay with Square app
- VeriFone currently is exposed and integral to all of these payment methods with the exception of Square
- VeriFone's recent selloff (which it has since recovered from) was caused by the announcement of new Square deal.
- At the time of this article VeriFone's market cap sits at $3.7 Billion
- The recent deal with Starbucks has put the implied valuation of Square at over $3 Billion
- Square does not process transactions outside of the United States
- VeriFone has a budding international business, posting year over year international growth of 103% in Q2, and 25% organic international growth
- Finally I do not believe there is much about Square's business that is proprietary. Below is a list of the mobile payment devices that I could find with a simple Google search, Including VeriFone and Paypal:
Intuit - (this is my personal favorite - it syncs with your QuickBooks - what could be better for a small business?)
Sail - (Owned by VeriFone)
On a side note - If Square was a public company with a valuation over $3 billion dollars, it would be my largest short position considering there are much bigger players with established relationships with major retailers already.
One last fact to consider is the secular trend of the worldwide shift away from cash transactions. Not only do worldwide banks aggressively push merchants to switch to cashless transactions systems, but governments globally are incentivising retailers to switch to electronic transactions. Electronic transactions help government with tax collections, which is the most important thing to world governments at this time - just ask Greece.
Taking all of these themes and facts into consideration, I find VeriFone to be a compelling investment; not just because of the high probability that they will be involved in the shift to mobile transactions, but for the valuation opportunity that it presents currently. I think the pressure put on VeriFone due to the Square deal has presented a market inefficiency that investors can take advantage of.