Shares of Target (TGT 1.28%) are trading near a 52-week low this month, following a massive security breach that left more than 70 million customers vulnerable to credit card fraud. But the recent malware attack could have far-reaching implications, not only for Target, but for the broader retail and banking sectors in the United States as well.
Sometimes real change comes at a cost
Target may be the most high-profile hacking case in recent years, but it certainly isn't the only one. Neiman Marcus also suffered a security breach over the holidays that put its customers' credit card data at risk. Additionally, IntelCrawler, a cyber-security firm, claims six other U.S. retailers may also have had sensitive data stolen in recent months.
In an interview with the Financial Times, IntelCrawler's CEO warned that more breaches, particularly at U.S. department stores, could be uncovered soon. Moreover, cyber attacks against retail outlets rose more than 100% last year, according to Cisco's annual security report.
With credit card fraud on the rise in the U.S., Target and other retailers may finally be strong-armed into upgrading their point-of-sale systems and adopting chip cards. Unlike traditional credit cards with a magnetic strip, these so-called smart cards contain silicon chips that encrypt and store sensitive information -- making it more difficult for thieves to obtain and duplicate it.
That's where VeriFone Systems (PAY) comes into play. The electronic payments provider is well positioned to profit from this shift, particularly as credit card companies such as Visa aggressively push retailers to upgrade their point-of-sale systems -- many of which VeriFone makes.
A Veri promising turnaround
In fact, there are more than 20 million of VeriFone's electronic-payment terminals in operation in the retail market today. The company has been in a transitional period recently as it tries to catch up to rivals in an increasingly mobile payments environment. But system upgrades and a shift to new credit card technology could be just what the doctor ordered. Retailers could purchase between 15 million and 20 million smart card devices -- adding around $100 million in incremental revenue to VeriFone's coffers, according to Barclays .
As soon as October of next year, Visa and other credit card companies will hold merchants such as Target accountable for fraudulent transactions that occur when a chip-enabled card is presented but unable to be used because the retailer failed to update its POS device. As a result, VeriFone should start to see a meaningful influx of customers upgrade their devices in the quarters to come. This could add upside to the stock in the year ahead. On top of this, VeriFone's new management team is making new tech a priority by investing in next-generation products. The company's payment-as-a-service business is also gaining momentum. In fact, the segment accounted for 40% of VeriFone's total revenue in the last quarter. These shifts in VeriFone's business model together with technology upgrades in the retail space should help its stock move higher in the year ahead.
