Does e-Bay’s Acquisition of Braintree Threaten Global Payments?

eBay's recent acquisition of Braintree does not significantly threaten Global Payments' long-term profitability. Global Payments has been finding new non-traditional revenue sources, and therefore it can keep growing.

Jan 23, 2014 at 3:00PM

Global Payments Inc. (NYSE:GPN) is one of the country's foremost payment-processing companies and a Fortune 1000 company. The company offers a comprehensive line of payment-processing solutions and acts as a go-between that connects merchants who accept credit cards with network companies such as Visa (NYSE:V) and MasterCard (NYSE:MA) who facilitate those cards. The ongoing revolution in the payment-processing industry, including still-nascent but rapidly evolving mobile payments technologies, has been sending shockwaves through the industry. This has made investors in companies such as Global Payments wonder if the intermediary will eventually become irrelevant.

In a disconcerting development for Global Payments, eBay (NASDAQ:EBAY) acquired Braintree, a global payments platform that works with online and mobile-only start-ups such as Airbnb and OpenTable, in September 2013.  Privately-held companies such as the wildly popular Square are also adding fuel to that fire.

Braintree is big business
Braintree is a big business, there is no question about that. The company processed transactions worth about $12 billion in 2013, including $4 billion of mobile payments. That translates to a good 60% of Paypal's estimated transactions of $20 billion in 2013. Alarmingly for Global Payments, Paypal will incorporate Braintree into its own operations, and Braintree is already hugely popular and widely accepted in many countries around the world. This will no doubt create a huge synergy between Paypal and Braintree, since many Paypal users who were formerly unaware of Braintree will now be exposed to the payment platform, and in all likelihood be tempted to adopt it.

How is Global Payments responding to the threat?
Growing acceptance of alternatives to traditional merchant services could create headwinds for Global Payments. eBay's Paypal offers its customers simple payment-processing programs that are usually lower-priced options. Both Paypal and its big competitor, Square, have forged several partnerships with retailers that enable them to accept payments directly through their own networks rather than merchant processors such as Global Payments. MasterCard and Visa are both exploring ways to take advantage of mobile payment systems so that they can keep a bigger chunk of the profit Global Payments currently gobbles up.

Global Payments recognizes the full impact of these threats and it has been moving to mitigate the dangers that put its future growth in jeopardy. Greater Giving, a segment of Global Payments, signed a deal with social media fundraising company Chirpify in August 2013 that will allow donors to make gifts by simply replying to posts on social networks such as Twitter and Instagram. Chirpify stands out as the only company that facilitates nonprofits, businesses and ordinary consumers to fund-raise on major social networks. The platform has to date facilitated over $2 billion worth of credit card payments to schools and organizations in the U.S.

Global Payments introduced its revolutionary HomeCurrencyPay payment platform in the U.S. in 2013.  HomeCurrencyPay is a Dynamic Currency Conversion, or DCC, service powered by Planet Payment's 'Pay in Your Currency.' The platform is a seamless POS service that enables merchants to pay for their merchandise in their own currency. Many industry insiders have hailed this non-treasury mode of payment and expect it to contribute significantly to Global Payments' growth.

Global Payments has also been spreading its wings and it has touched base in several emerging economies such as the Philippines and Morocco. Many payment-processing companies have been reluctant to move into Africa despite the continent being touted as the 'Last Frontier.' The bold move by Global Payments might therefore pay off handsomely and provide the company with a non-traditional source of revenue.

Impressive bottom-line growth
So far there is little evidence to show that the new developments in the payment-processing industry have slowed down Global Payments' top-line and bottom-line growth. The company recorded a healthy 8% revenue growth in the first-quarter of fiscal 2014 and an impressive 15% growth in earnings. The company further expects to expand its bottom line in fiscal 2014 by 10%-12% to $4.03-$4.10 per share.

The company's shares have fully recovered from the 2012 sell-off that followed its information security breach and they now trade at all-time highs. However, despite the shares' meteoric rise, they are still rated as 'Industry Outperform' with a 'Buy' recommendation.

How are Global Payments' peers doing?
Both Visa and MasterCard do brisk business with Global Payments. Both companies are payment-processing companies with zero-credit exposure, an attribute that has helped them beat rivals American Express (NYSE:AXP) and Discover Financial (NYSE:DFS). Here is how the four performed in 2013.

 

Visa

MasterCard

American Express

Discover

Ticker

V

MA

AXP

DFS

Share price (12/11)

$205.66

$790.57

$83.90

$52.68

2013 YTD returns

35.7%

60.9%

46%

36.7%

Market Cap

$131 billion

$95 billion

$90 billion

$25 billion

Revenues

$11.8 billion

$8.1 billion

$30.4 billion

$6.8 billion

Profit margins

42.3%

38.2%

15.4%

34.5%

Return on Equity

18.3%

42.5%

24.2%

26%

Net Income

$4.9 billion

$3.1 billion

$4.6 billion

$2.3 billion

Earnings per Share

$7.59

$25.28

$4.23

$4.46

Forward Dividend Yield

0.8%

0.3%

1.1%

1.5%

Price to Book

4.7x

12.0x

4.8x

2.5x

Price to Forward Earnings

19.8x

25.5x

15.5x

10.4x

Many investors consider MasterCard the leader of the space due to its high growth rates, high operating margins, and impressive return on equity, or ROE. Visa debuted into the stock market in 2008 and since then the company has been very impressive. The company has been growing its revenue at a blistering 20% annual clip and it grew its profit by an astounding 83.75% between 2010 and 2013, from $2.97 billion to $5.45 billion. The fact that both Visa and MasterCard have zero credit exposure minimizes the risk of their businesses taking a hit in the event of a financial meltdown like the one that happened in 2008.

Meanwhile American Express and Discover Financial Services operate as both payment processors and lenders. They act as one-stop shops that issue their own cards to customers, authorize consumer purchases, and then settle with merchants and consumers. Although this helps them to double-dip in profits, it also exposes them to a high risk of bad-debt write-offs if economic growth slackens. Nevertheless, this is already priced into their share prices and their healthy dividend yields make them attractive investments too.

Bottom Line
Global Payments operates in a highly competitive industry that is also undergoing a major transformation. However, the company has a proud history of innovating and meeting any challenges that are thrown its way. Global Payments' shares are a great investment for any long-term investor.

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Fool contributor Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends American Express, eBay, MasterCard, Twitter, and Visa. The Motley Fool owns shares of eBay, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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