Evidence That Apple Intends To Start Mobile Payment Processing

| About: Apple Inc. (AAPL)
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Recently, there has been talk that Apple (NASDAQ:AAPL) is stuck in a trading range until a major catalyst is announced. Based on the evidence below and in a prior article I wrote in December (link is below), it appears that Apple is going to enter the Mobile Payment Processing business. Katy Huberty of Morgan Stanley, who has a history of making good calls, has predicted an announcement by June.

Mobile Payment Processing is a natural for Apple and would diversify Apple's revenue. It has huge growth potential, and payment processing companies sell for higher P/Es than Apple (see the P/E comparison below). If it causes Apple's Forward P/E to increase from 11.3 to 12.9 (I chose 12.9 because it is Microsoft's Forward P/E as of 2-25-14, and surely not too much to hope for), that would be about a $74 per share increase. I am overweighted in Apple, and urge you to look at the evidence below and comment if you have an opinion or insight concerning the potential impact Mobile Payment Processing could have on Apple's stock price.

Below is part of the evidence I have collected. I think the quotes by Tim Cook and Carl Icahn below are consistent with the other evidence. It appears to me that Apple has already hired people to run payment processing (see number 3 below) and that Mr. Icahn knows it is coming, and apparently Katy Huberty does too (see number 4 below). I would try iPay (or whatever Apple calls it) and I think most other iPhone owners would too. I have no doubt Apple can do mobile payment processing better than PayPal.

I think a major perception problem for Apple is that most people seem to consider it a "hardware company" without much growth potential and with too many eggs in one basket. What isn't being considered is the potential that Apple has due to its loyal upper-income customer base and 500 million iTunes accounts. Credit card security is an issue that is being widely discussed today, and retailers want improvements in credit card security because they lose money every time there is a chargeback for fraud.

Lots of companies are working on mobile payment processing, but none of them are as strong as Apple when it comes to a loyal customer base, name recognition, customer trust, financial and technical capability, and of course, Apple controls the smartphone that is used for most mobile purchases. Apple could start as a facilitator of secure credit card transactions on iPhones - Apple would get a small fee for each transaction, like PayPal does, but not try to be a credit card company like Visa (NYSE:V), at least not initially. Apple does, of course, have the potential to do much more.

Evidence That Apple Intends to Start Mobile Payment Processing

Apple is very secretive, but evidence points to the company entering the payment processing business this year. Below is some of the evidence I have found:

1. An article on Time.com on 1-30-14 by Martha White titled "Apple's Next Big Thing Could Be Allowing You to Easily Pay for Stuff" says:

"In the wake of the Target and other big data breaches, retailers and banks are making the case that we need more secure purchase methods. But since they can't agree on who's going to pay for all the associated costs, consumers are pretty much stuck with the antiquated system we've got for the time being. Could Apple come to the rescue? Apple CEO Tim Cook hinted at the possibility when he said mobile payments were an idea that "intrigued" the company. "You can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices…that it's a big opportunity on the platform," he told investors on the company's quarterly earnings call this week."

The Time article also quotes Carl Icahn -- "We believe a revolutionary payments solution is now a very real opportunity that the company could choose to pursue," Carl Icahn wrote in an open letter to Apple shareholders last week. Icahn is openly lobbying for eBay to jettison payments platform PayPal, for which he told TIME, Apple could be a "serious" suitor."

2. "Apple is not a hardware company," Tim Cook said at the Goldman Sachs Technology and Internet Conference in San Francisco (February 2013 ). "Because we're not a hardware company, we have other ways to make money and reward shareholders," he said. Source - Business Insider, Owen Thomas, 2-12-13

3. From iPhoneHacks.com on 1-25-14, an article titled "WSJ: Apple Prepping Mobile Payment Service" writes:

"Apple is building the infrastructure for a mobile payment service, claims the Wall Street Journal. Executives such as Eddy Cue, Apple's VP of Internet Services, have been meeting with other industry leaders to discuss the possibility of Apple processing mobile payments for physical goods and services. People with knowledge of the situation claim the company has moved executive Jennifer Bailey from her position in Apple's online storefront to a new role that'll oversee the development of a payment business. Apple allegedly spoke to five other executives in the payment industry before selecting Bailey for this role. "Apple is absolutely the sleeping giant in the payments world," said Denee Carrington, analyst at Forrester Research. "They have the capability; they just haven't tied it all together." A recent Apple patent application reveals how Apple may enable a mobile payment service using its iBeacon technology. In this method, the phone would initiate a secure connection via Bluetooth or NFC to a point-of-service terminal that'll process the payment."

4. From Tech Trader Daily on 1-21-14:

"Morgan Stanley's Katy Huberty... writes that she expects new services this year from Apple, including a mobile payments service, which should receive its debut by the June developer conference."

I have posted a lot more information and links about this subject in the Comments to an article I published on Seeking Alpha on December 11, 2013 titled "Why Apple's Next Big Innovation Might Be iBeacons And Mobile Payment Processing." That can save a lot of time if you want more information on this subject.

Why Apple Can Do Payment Processing on iPhones Better Than Anyone Else

There are hundreds of companies that have the technical ability to create a mobile payment processing app, but that is not the key to success - a successful system requires both stores and customers to sign up. I have read that there are over 100 companies working on mobile payment processing, but all of those companies, even Google (NASDAQ:GOOG) and PayPal, lack one or more of the things listed below:

1. Apple has the cash to hire as many people as necessary to make it work without having to raise any money.

2. Apple has almost 100% name recognition. No one will ask "Who is Apple?" or say "I've never heard of them."

3. Apple has a very loyal customer base. I will try its payment system and millions of other Apple customers will try it within 30 days of it coming online. Apple has a built-in customer base ready to launch in a big way, and retailers know that. That helps ensure success. All it will take is for one national retail chain in each category (grocery, department stores, etc.) to sign up, and the others will follow because they will be afraid their competitors will gain an advantage if they don't.

4. Customers and retailers trust Apple to get it right and to not screw up or invade their privacy. I think that is important after all the news about hackers and the Target (NYSE:TGT) credit card data being stolen. Apple already protects 500 million credit cards in iTunes accounts and can spend whatever is necessary to create a hacker-proof system. If it costs $5 billion, no problem.

5. Apple controls the smartphones that most upper-income people own in the U.S., and retailers know this.

I think Apple may have been planning this for years, and that is why it didn't install NFC in iPhones (even though it was pressured to) and why it developed iBeacon technology.

Comparison of Apple to Microsoft (NASDAQ:MSFT), Google, Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY), and Visa

Company F P/E Cash Op. CF
Apple 11.3 $41B $52B
Microsoft 12.9 $83B $28.2B
Google 19.9 $58B $19B
Amazon 84 $12.5B $5.5B
eBay (PayPal) 16.5 $9B $5B


21.8 $4B $7.4B

Source: Yahoo Finance Key Statistics on February 25, 2014.

Microsoft is included to show that Apple's Forward P/E is now even lower than Microsoft's. Visa is included to show how the market values payment companies that have strong balance sheets. eBay is included because it owns PayPal. Google and Amazon are included to show how the market values perceived potential and buzz. (The numbers in the above table are simplistic, but they make the point. Cash doesn't include long-term investments - Apple has $118B. F P/E is Forward P/E. Op. CF is Operating Cash Flow ttm.)

A Catalyst That Should Raise Apple's Share Price

I think the official announcement that Apple is starting Mobile Payment Processing should raise the share price. Mobile Payment Processing has huge growth potential, and Apple is very well-positioned to be successful. It will cause analysts to re-think Apple's potential, create a reason for optimism, and prove that Apple can do more than just hardware. Two criticisms of Apple are that it "can't innovate any more" and that it lacks diversification. In the quote in the Evidence section above, Carl Icahn mentions a "revolutionary payments solution" - that would certainly qualify as innovative. I won't speculate on the amount of actual earnings that might result, but from the table above, it is apparent that Apple's Forward P/E is much lower than Google, Amazon, and companies engaged in payment processing that have strong balance sheets, and it is now even 12% lower than Microsoft (as of 2-25-14). If Apple's P/E increased even a little, the share price increase could be significant. For example, if Mobile Payment Processing causes the market to have a more favorable view of Apple and results in P/E expansion to even 12.9 (the same as Microsoft), Apple's price per share would increase by about $74 (based on 2-25-14 data). A 12.9 P/E is still at least 20% lower than any company listed above, except for Microsoft.

Any thoughts or insights from readers are appreciated.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.