VeriFone Systems (PAY) just reported a solid quarter for Q3 2012. The company posted record results for the 11th consecutive quarter. Revenue for the quarter increased 56% over Q3 2011. Earnings per share came in at $0.75 vs. an estimate of $0.70, resulting in a 7% earnings beat. So, why is the stock getting punished from a 52-week high of $55 down to the current price of $30? The sell-off immediately following the quarterly report was due to the company actually missing its revenue estimates for the quarter. VeriFone reported revenue of $489 million which fell short of the $498 million estimate. The company also lowered revenue guidance for the fourth quarter citing a range of $495 million to $500 million versus Wall Street's forecast of $519 million.
The company's CEO, Douglas Bergeron appears overly optimistic about VeriFone and might be ignoring encroaching competition such as Square. Square is currently a privately owned company which was started by Jack Dorsey. Square is an innovative device that plugs into smartphones enabling users to swipe their credit cards to pay for purchases. This presents competition for VeriFone, which sells electronic payment systems.
Could VeriFone buy out Square, eliminating it as a competitor? This is highly doubtful as VeriFone only has $366 million in cash. Square has been estimated at being valued at $1.6 billion and is looking to grow to be valued at $2.5 billion to $4 billion.
I think the company might be blinded by this encroaching competition. It appears that the payments landscape is changing with the ability to use smartphones for payment. The company did acknowledge that some consumers will pay with cash, some will use their phones, and some will use their credit cards. However, there was no specific mention of Square in the quarterly report.
At first, I thought the sell-off might be an overreaction due to the competition scare. However, it is difficult to gauge how much impact smartphones will have with respect to total point-of-sale payments. I think that the sell-off in VeriFone stock is really reflecting that uncertainty.
VeriFone is undervalued with a forward PE ratio of 9.46 and a PEG of only 0.52. However, that does not mean that the stock won't fall further. It may take a while for the negative sentiment about the company to bottom out. The stock could drop another $10 or 33% before the bottom is in.
What the company needs is a clearer picture on how much the encroaching competition will affect its market share. VeriFone needs to first acknowledge all of the potential competition and then gauge how much it will impact the company's revenue and earnings for the future.
I think that the sell-off in VeriFone's stock may continue down to about $20 per share. So, to answer the title's question, I don't think that the sell-off has created a buying opportunity yet. We will have to re-evaluate that when more information regarding the company's outlook is known.