Wirecard: Riding The Online And Mobile Payment Wave

| About: Wirecard AG (WCAGY)

Summary

E-commerce payments is a rapidly expanding $2 trillion global market.

Wirecard comes out on top in our value/growth/profitability screens versus its e-commerce payment processing peers.

Ingrained advantages in fragmented EU markets, strong Asian presence, and newly-acquired global scale have set up Wirecard for solid growth and profitability.

E-commerce continues to exhibit strong growth at the expense of brick-and-mortar retail sales. In 2016, US e-commerce sales rose 16% to $385B, while retail sales only budged 2%, according to BI Intelligence. There is still plenty of headroom for online sales to grow, as online sales are only around 10% of total retail sales. BI expects e-commerce sales to reach $632B by 2020. Similarly, EU online sales rose 12% to €510B ($547B) last year, and are expected to increase 17% to €598B ($642B) in 2017, according to Ecommerce Europe. In Asia, online sales jumped 31% last year to $1,152B, with China contributing $911B, according to eMarketer. This strong growth should continue. Asians are twice as likely to buy online compared to people in other regions. Mastercard (NYSE:MA) expects that Asia's middle class will expand to over 1.7B people in 2020.

The advent of mobile payments is adding to online and overall payment growth. Near-Field Communications technology is enabling platforms like Apple Pay (NASDAQ:AAPL) to enter the mainstream. While still small today, mobile payments growth is taking off.

A beneficiary of this online and mobile payments megatrend is the e-commerce payment processors. These companies take a small percentage fee to process each e-commerce transaction, in addition to other value-added services.

Several e-payment processing companies exist. But the number of pure-play e-commerce payment processors in the public markets is less plentiful. In Asia, Alipay dominates about half of the Chinese market, but one would need to buy Alibaba (NYSE:BABA). Several POS terminal companies like VeriFone (NYSE:PAY) or Hong-Kong-based PAX (SEHK: 327) dabble in e-commerce, with France-based POS terminal maker Ingenico (OTCPK:INGIY) having more online payment processing exposure. Visa (NYSE:V), Mastercard, and American Express (NYSE:AXP) have legacy traditional consumer businesses.

A dozen quoted e-commerce payment processors are assembled below. The three equally weighted criteria are EV/Revenue-to-Revenue Growth, P/E-to-EPS Growth, and EBITDA Margins.

E-commerce Payment Processors

Company

Ticker

Price $
3/14/17

EV/Revs

EV/EBITDA

P/E

Rev Growth

EPS Growth

Ingenico

ING.PA

95.66

2.4x

12.9x

23.0x

+5%

+10%

Paysafe

PAYS.L

5.45

3.0x

11.5x

19.7x

+21%

+10%

Worldline

WLN.PA

28.53

2.5x

15.3x

24.6x

+7%

+13%

CardConnect

CCN

13.95

1.0x

55.0x

36.7x

+28%

+5%

Worldpay

WPG.L

3.50

6.0x

14.4x

43.6x

+15%

+21%

GlobalPayments

GPN

79.07

4.2x

16.0x

56.9x

+5%

+12%

PayPal

PYPL

42.10

3.8x

19.7x

36.9x

+17%

+17%

Vantiv

VNTV

63.70

3.8x

16.1x

48.3x

+13%

+14%

Square

SQ

16.77

3.3x

NM

NM

+35%

+80%

EVERTEC

EVTC

16.25

4.6x

11.8x

16.1x

+4%

+8%

HiPay

HIPAY.PA

12.84

1.0x

26.8x

57.5x

+16%

+90%

Wirecard

WDI.DE

51.66

5.3x

19.3x

23.0x

+31%

+28%

Group Median

3.6x

16.0x

36.7x

+15%

+14%

Figures based on last 12 months' data except next 12 months' EPS growth

Sources: S&P Capital IQ, Quan Funds

Generally, these are not cheap stocks, with median EV/Revenues of 3.6x and P/E of 36.7x. But growth is not cheap in today's market. Investors are receiving 14%-to-15% top and bottom-line growth for those valuations, with 22% EBITDA margins.

E-commerce Payment Processors

Company

EV/Revs to Rev
Growth

Rank

P/E to
EPS Growth

Rank

EBITDA
Margin

Rank

Wtd Rank
Score

Total Rank

Ingenico

0.46x

10

2.42x

8

19.0%

8

8.67

12

Paysafe

0.14x

4

2.02x

5

25.6%

5

4.67

3

Worldline

0.37x

8

1.94x

3

16.5%

9

6.67

7

CardConnect

0.04x

1

6.98x

11

1.7%

11

7.67

10

Worldpay

0.41x

9

2.05x

6

41.6%

1

5.33

4

GlobalPayments

0.93x

11

4.61x

10

26.2%

4

8.33

11

PayPal

0.22x

6

2.12x

7

19.4%

7

6.67

8

Vantiv

0.29x

7

3.34x

9

23.8%

6

7.33

9

Square

0.09x

3

NA

NA

-2.4%

12

6.00

6

EVERTEC

1.07x

12

1.94x

4

39.1%

2

6.00

5

HiPay

0.06x

2

0.64x

1

3.6%

10

4.33

2

Wirecard

0.17x

5

0.83x

2

27.7%

3

3.33

1

Group Median

0.25x

2.05x

21.6%

6.33

While the group can be viewed as fully-valued, even adjusted for higher growth and profitability, a few stocks look attractive, notably Wirecard (OTCPK:WCAGY).

Founded in 1999, Wirecard was initially geared to European online merchant payments. In 2006, Wirecard became an issuing bank, and was not just acquiring merchants anymore (in industry jargon, the company became an "issuing and acquiring PSP" - payment service provider). This enabled the company to issue virtual and standard cards, and to capture a larger piece of the payment processing value chain. In 2010, management astutely set up operations in Asia, and then grew the Asian business organically and via M&A. Today, Asia is booming, providing over one quarter of the company's 2016 revenues of €1.028B ($1.101B). This month, Wirecard finally closed on its acquisition of US-based Citi Prepaid Card Services. Wirecard now has a global footprint, from which to offer its many service offerings, and will provide plenty of cross-selling opportunities for its new US subsidiary.

Wirecard is an omni-channel, e-commerce payment processor that supports all market participants from local service providers to Visa and Mastercard. Wirecard has ingrained itself in a fragmented and complicated EU market, so that it can uniquely provide seamless payment processing in cross-border transactions to all types of customers. This flexibility, plus Wirecard's sound balance sheet, issuing bank status, and Asian footprint, have made Wirecard the partner of choice for large customers/peers ranging from Apple Pay to VeriFone. For its merchant customers, Wirecard transforms valuable end-user data into targeted actions. These attributes also enabled Wirecard to grow at an above-average rate. Revenues increased 33% last year, doubling the industry average.

Wirecard Financial Dashboard

€, millions

2014

2015

2016e

2017e

2018e

Revenues

601.0

771.3

1028.3

1314.0

1585.0

% change

+25%

+28%

+33%

+28%

+21%

EBITDA

170.2

227.3

307.0

394.0

481.0

as % of Revs

28.3%

29.5%

29.9%

30.0%

30.3%

Net Income

107.9

142.6

273.2

267.0

334.0

EPS

0.89

1.16

2.21

2.16

2.70

EPS Cont Ops

1.02

1.32

1.74

2.22

2.70

% change

+29%

+29%

+32%

+28%

+22%

Wirecard provides visible, above-average growth, and is showing no signs of reverting to a lower mean. In fact, synergies from the recent Citi Prepaid Card Services acquisition could provide upside to our forecast.

The majority of Wirecard's revenues come from transaction processing. This is a highly scalable business, with incremental revenues falling to the bottom line before discretionary expenditures like software development and M&A. The transaction margin has decreased to 1.6% last year versus 2.4% about four years ago, as larger volume customers are a greater percentage of total revenues. Furthermore, European Commission regulators have bank processing fees under a microscope. This risk is somewhat mitigated by the substantial absolute Euro amount of proceeds that these large customers provide and the low incremental cost of providing those transactional services.

Apple Pay poses both a threat and an opportunity to Wirecard. Apple Pay, or Facebook (NASDAQ:FB) for that matter, could potentially bypass the whole online payment processing system, including Wirecard. But the time, resources, and know-how to deal with each EU market as well as Wirecard's unique mobile payment processing software, have thus far made Wirecard a valuable partner for Apple. Last year, Wirecard's Host Card Emulation app for mobile payments, which works with Near-Field Communication, was teamed up with Apple Pay in a successful UK launch.

The largest risk is Wirecard's success will draw competition. In Europe, emerging companies like HiPay, Dalenys (NYS.BR) are emulating Wirecard's business model. Larger companies like Alibaba, Square and PayPal can more aggressively encroach on Wirecard's turf. These are not new risks; and thus far, Wirecard's growth and profitability have not been inhibited.

Currently priced at €48.55 ($51.66), Wirecard shares are just breaking out of its last six-month ceiling of €46. Just holding Wirecard's valuation constant provides 30% upside over the next 12 months from current price levels.

Wirecard is an attractive long-term investment. Wirecard is fully exposed to the online and mobile payment boom that will continue for several years. Wirecard is an innovator with critical mass in its online payment processing sector, and has just established a global footprint which should provide further growth. Finally, the company is profitable with a scalable business model. While risks exist, Wirecard is an attractive business for investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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