Finding opportunities in technology

Garry Laurence

Profeta Investments

In the payments sector, there are plenty of attractively priced, high-quality companies that are growing – despite the significant falls among profitless technology companies, meme stocks and high beta growth companies over the past few months. Global Payments and Smartpay are some wonderful opportunities in this sector in Australia as well as globally. 

Global Payments

Global payments is a global payments technology company providing payments and software solutions to over 3.5 million merchant locations across more than 100 countries. Global payments provides the merchant with a point of sale terminal card or mobile device reader, services the payment and provides software to help the merchant manage their business. They authorise the payment by connecting to the card issuer’s bank and then manage the payment process. Global payments also offers its customers software solutions to help them manage their business. They provide enterprise software solutions to the hospitality industry through their product Xenial, as well as cloud-based enterprise solutions to a variety of industries such as event organisers, educational institutions and gaming companies.

Global Payments differentiates by way of its technology and localised compliance and support offered to multinational companies. It has localised compliance and support at scale in forty countries which differentiates them from Worldpay and Adyen

The company's technology integrates software, hardware and payments in both the physical and virtual worlds. This provides a single API, allowing clients to build on top of the open architecture and provide high touch support to developers. 

Global Payments is one of the largest merchant acquirers in the small and medium sized business segment in the United States. It is also the number one player in third party payment card issuer processing in the US and Canada. 

The fundamentals of the business have continued to be strong, generating double digits earnings per share growth over the past decade, and the market expects earnings to grow by 27% this year and 17% next year. But the stock price has seen a dramatic fall due to fears about BNPL providers changing the dynamic of the industry as well as the potential for cryptocurrency payments to change the industry. 

Also, the increasing covid infection rates had the effect of slowing growth in 2020 to 3% as people stayed home more, but this has reversed in 2021. 

We think all these fears are overblown as merchants want one simple provider with a simple solution to take any payment form that a customer would like to use, whether that be a loan type product like buy now pay later or a cryptocurrency. You can see how much Global Payments has de-rated in the past year in the chart below.

Global Payments is led by a seasoned executive team with Jeff Sloan, the CEO, having more than 25 years of experience in financial technology at Global Payments and Goldman Sachs. Jeff has been running Global Payments for the past decade and has done a phenomenal job of delivering the double-digit annual earnings growth. 

The chairman, Troy Woods, is equally as experienced, having run one of the major parts of the business, TSYS since 1987. We expect this seasoned team to continue to benefit from the continued shift from cash to electronic payments and the trend of independent merchant acquirers winning business off major banks around the world. The company's ability to integrate payments with software to manage the merchant relationship creates a powerful ecosystem.

Smartpay

Smartpay is an emerging merchant acquirer in the payments industry. The company started off in New Zealand and is now growing quickly in Australia. The business is led by Marty Pomeroy, who has done an exceptional job in building out a platform for many years of growth in Australia. The company has built out next generation customer interface systems and digitised their terminal management and acquiring platform and have tailored their solutions to Australia and New Zealand’s compliance environment. The company differentiates on a number of fronts which includes their innovative technology, low-cost options for merchants and 24/7 local support. They have been winning share from the major banks largely due to their zero cost eftpos solution as well as their Smartcharge product.

The Smartcharge product enables the merchant to pass on the fixed rate acquiring fee to the customer, which gets debited automatically and is charged on all transaction types (tap or dip). The major banks don’t provide this type of optionality and Smartpay is comfortably winning share off the major banks in Australia, alongside with their better-known competitor, Tyro. Their other major competitor, Square, doesn’t have this type of surcharge functionality and their fees are higher.

Smartpay currently has 8100 terminals in Australia and is adding about 700 terminals a quarter. This is a small fraction of the 250,000 terminals in the SME market. Given their focused offering targeting small to medium sized enterprises, we expect them to have many years of significant growth. 

Marty Pomeroy, the Chief Executive Officer, joined Smartpay in January 2013 post the acquisition of his private business Viaduct Limited. We always like to invest in companies where the CEO has built a business in the industry from scratch and has extensive experience in the industry.

The tide seems to be turning against buying businesses and assets blindly

One of the best investment strategies over the past decade has been to buy exciting businesses, regardless of price. This has resulted in an unusually large price gap between growth stocks and low P/E stocks. Last month we wrote about what happened to equity markets when this scenario occurred over twenty years ago during the technology bubble. The mispriced, cheap stocks actually went up as the market dropped. In the past month as the market started refocussing on abnormally high inflation and pricing in interest rate rises for 2022, we started to see this same phenomenon starting. We expect this trend to continue into 2022. While the loss making and highly valued companies dropped significantly in December, highly profitably established companies like AT&T rallied.

 

At Profeta Investments, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when they are priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close. Our investments in Goedekers, a fast-growing ecommerce business and the payments companies mentioned above are good examples of us buying quality growing businesses at opportunistic prices after a stock price fall. As Warren Buffett says, “Price is what you pay, value is what you get.” 

When you invest against the short-term market trends, often the price continues to drift despite you getting exceptional value. We are excited about the businesses we own and their current valuations.

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Chief Investment Officer
Profeta Investments
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