Global Payments Stock Forecast

Global Payments Stock Forecast: Global Payments Inc. [NYSE: GPN] is a leading payments technology company and one of the largest credit card processors in the merchant account industry. The firm provides payment technology and software solutions for card, electronic, check, and digital-based payments in over 100 countries throughout North America, Europe, Asia Pacific and Latin America.

It operates through three segments:

• Merchant Solutions,
• Issuer Solutions, and
• Business and Consumer Solutions.

GPN provides credit and debit card processing and other electronic payment processing services for financial, corporate, government and merchant communities worldwide. Global Payments was founded in 1967 and is headquartered in Atlanta, Georgia.

The Bull Case for Global Payments

Global Payments spun off from National Data Corporation, its former parent company, and provides payment processing services to merchants by allowing them to accept credit and debit cards, along with other payment types.

GPN facilitating more than 6 billion transactions per year is one of the leading players in the market, thanks to its fundamental strength, and also because of the rapid transformation of the digital payments industry as a whole.

Inorganic Growth Strategy Has Been On Fire

Global Payments has been making heavy investments to shore up its inorganic growth.

The company in September gained access to the fast-growing global markets with physical and virtual presence in more than 100 countries, quite apart from realizing expense synergies ($375 million to $400 million) from its $21.5 billion mega-merger with card issuer Total System Services.   

CEO, Jeff Sloan reiterated his commitment for further large-scale acquisitions, while continuing to chase small bolt-on purchases to bolster growth.

In September, Global Payments agreed to acquire MineralTree, a cloud-based software platform, for $500 million. It will accelerate its transition into business-to-business payments, given that its traditional strength has been in facilitating transactions between businesses and consumers.

It’s also inked a multi-year deal with Alphabet (GOOGL) to collaborate on payments technology. Under the agreement, Global Payments will migrate its merchant acquiring technology to Google Cloud, and will provide merchant acquiring services to Google to extend its global market reach. In addition, Global Payments and Google Cloud will be launching a series of strategic go-to-market and co-sell activities together.

GPN also announced a new, multi-year collaboration agreement with Amazon Web Services to provide a cloud-based issuer processing platform to financial institutions around the world.

As part of this agreement, Global Payments and AWS will strategically collaborate to transform Global Payments’ core issuing platform to deliver secure, innovative solutions for the payment industry at scale.

Additionally, GPN acquired Zego in an all-cash transaction valued at $925 million.

Zego provides resident experience management software and digital commerce solutions to property managers primarily in the United States. The transaction extends Global Payments’ leadership in software into the real estate vertical, a $6.5 billion target addressable market with a strong payment nexus and significant secular tailwinds.

GPN also signed a new multi-year partnership with Banco Carrefour in Brazil, the financial services arm of the country’s leading supercenter retail chain, to provide a range of technologies for its credit card and digital accounts.

Additionally, GPN acquired Bankia’s payments businesses in Spain, and the company hopes to further deepen its presence in Europe with the acquisition. Additionally, its MoneyToPay joint venture agreed to purchase Bankia’s prepaid business as the company continues to execute on its strategy to expand and diversify its NetSpend business into international markets.

Organic Growth Strategy: 60% Revenue From Tech

The company operates in a highly dynamic industry with rapidly changing technology. GPN, aware of this fact, has been making heavy investments in technology, and as a result, the company generates close to 60% of its revenue from technology engagement.

More importantly, revenue from e-commerce and e-commerce/Omnichannel is likely to witness strong growth in the coming years.

Considering the trajectory of the e-commerce business, this possesses some serious revenue-enhancing potential for the company.

Financials Beat Expectations

GPN delivered a terrific second quarter with net revenue, operating margin, and EPS outperforming estimates.

Net revenues increased 28% to $1.94 billion, compared to $1.52 billion in the second quarter of 2020. EPS increased 56% to $2.04, compared to $1.31 in the second quarter of 2020, while operating margin of 41.8% expanded 480 basis points.

Buoyed by the strong figures, management raised guidance for the entire year 2021, expecting adjusted net revenue to be in the range of $7.70 billion to $7.73 billion, reflecting growth of 14% to 15%, and adjusted earnings per share estimate to be in a range of $8.07 to $8.20, or growth of 26% to 28% over 2020. 

The company also hiked its dividend by 28%, which demonstrates the management’s confidence with respect to the sustainability of 28.1% year-over-year revenue increase. The board has also allowed a $1.5 billion share repurchase program.

Now Is The Time To Pay Attention to GPN

GPN has a stellar M&A record. Moreover, improving spending trends and solid growth in e-commerce are strong tailwinds for the business.

The dividend increase and positive guidance by the company demonstrate the confidence of the management.

Stock performance has been below par recently, which makes it just the right time for the investors to pay attention.

High-quality payments companies rarely get that cheap all that often, which makes GPN a good choice for bargain hunters looking for a high-performance company with tremendous revenue growth opportunities.

Will Global Payments Stock Recover?

GPN has had a history of success, thanks to the various competitive advantages it possesses in the industry it operates in. However, it should be remembered that GPN operates in an industry currently in the midst of an upheaval because of the fast-changing technology and the entry of new players.

The top concern for GPN as well its investors currently is the entry of startup fintech and BNPL. The market share of BPNL is rapidly growing its disruption potential for firms like GPN.

However, certain analysts believe that the BPNL risk for a business-like Global Payments is blown out of proportion. The BNPL industry last year was $90 billion in total growing at a 13% CAGR. The figure, undoubtedly, looks impressive but then it is pretty minuscule in comparison to credit card spending which totaled $7 trillion last year only in the U.S.

Also, researches point out the fact that BNPL users are simultaneously increasing their credit card spending, which again indicates that BNPL firms like Affirm don’t represent an outsized threat to traditional card and payments service providers like GPN.

More importantly, GPN itself processes 128 million BNPL payment installments monthly and has new BNPL checkout options with Visa and MasterCard.

Global Payments CEO Jeff Sloan does not think much of the threat posed by BPNL either, stating that many of the so-called disruptors have been there for long, and the company has thrived amidst a number of fintech startups and other disruptors while delivering consistent performance.

Also, many analysts assert that GPN’s competitive niche is stable, as it operates in a space that is well above and beyond the micro-merchant focus of Square and other upstarts, whose payments volumes and growth rates remain too small, but below the area of focus of larger competitors.

The Bear View Consensus

A majority of experts hold the opinion that the biggest risk for Global Payments remains disintermediation of the current payments process and that BNPL and other such concerns are merely red herrings by comparison.

The payment space is undergoing rapid transformation, and the competition is growing intense by the day. Moreover, the stock has been performing poorly recently, and the growing competition could to financial volatility. This could impact dividend policies and erode investors’ confidence. 

The company has relatively poor balance sheet ratios, indicating that liabilities are a concern, and solvency & liquidity risks could arise.

All in all, the technologies posing risk to Global Payments have not been implemented at scale, and only time will tell what the final outcome would be. The situation needs careful monitoring, and awareness of the factors that could change the competitive balance in the industry, whether in favor of GPN or against it.

Global Payments Stock Forecast

In one year, the stock price forecast for GPN stock forecasts ranges from a high of $240.00 to a low of $185.00.  On average, it is expected that Global Payments’ stock price will reach $220 in the next twelve months. This suggests a possible upside of around 53% from the stock’s current price.

Is Global Payments Stock A Buy?

Despite the pandemic recovery lagging in many markets, it operates in, GPN had a knockout quarter with strong net revenue growth, operating margin expansion and EPS growth, all of which came ahead of expectations.

The payment processing company reported 28% revenue growth while the operating margin expanded from 37.0% to 41.8%.

Earnings per share increased 56% to $2.04, compared to $1.31 in the second quarter of 2020, and the company announced a 28% dividend hike.

Irrespective of the knockout figures, GPN stock price slid south, and remains well down from the record highs of $193 witnessed around July.

Analysts think that the slide could be attributed to Square’s [NYSE: SQ] announcement at the same time that it is acquiring Afterpay, a buy now, pay later (BNPL) specialist. The announcement coaxed investors to adopt a more cautionary approach towards GPN.

But it would be foolish to write it off yet, as GPN has a proven track record of being a dominant and disruptive player in the domain it operates. Keeping this factor in mind, let’s analyze the present and future prospects of the company, and whether it is a safe bet for investors.

GPN: Segment Analysis

Global Payments’ business is organized into three segments: Merchant Solutions, Issuer Solutions, and Business and Consumer Solutions.

Merchant Solutions – The Merchant Solutions segment provides payments technology and software solutions to customers globally through integrated solutions, vertical software solutions, and Omnichannel services.

Issuer Solutions – The issuer segment provides outsourced services to card issuers to efficiently manage their consumer card offerings, reduce technical complexity and offer a seamless experience for cardholders on a single platform.

Business & Consumer Solutions – This ancillary business provides basic financial services to the underbanked and other consumers and businesses in the United States through Netspend brand. Revenue is generated through cardholder fees, either on a monthly/annual plan or a fee-per-transaction plan.

Analysts believe that Global Payments will continue to benefit from favorable long-term tailwinds such as increasing digitization of payments. More importantly, the company as well as the overall industry is going to reap rich rewards from capturing share in the business-to-business (B2B) industry, which is huge in comparison to the consumer payments segments, yet almost half of the transactions are done via checks.

The best thing about payments businesses is that they are naturally scalable, which means margins are going to expand with each incremental transaction. Indeed, Global Payments’ operating margin expanded from 37.0% to 41.8% in Q2 2021, with the company now forecasting 50-75 basis point expansion.

Moreover, payments companies such as GPN have much of their revenues tied to payments volume. What it means is that the revenue of these companies increases with increasing prices that consumers pay.

These factors have helped GPN deliver superb performance with the business returning 16.5% annualized return over the past five years.

And talking about the future, GPN’s prospects like good with multiple factors working in its favor. The firm’s exclusive distribution partnerships with tech giants Google and Amazon Web Services reinforces GPN’s position as a premier payments company in today’s technological environment.

The company is also keen on expanding its B2B footprint as seen from its recent acquisition of accounts payable automation software provider MineralTree. The company has also expressed its intentions of spending heavily to finance further investments in B2B and other areas. It is to be noted that B2B is a $125 trillion payments opportunity, which means penetration of this market can deliver an outsized impact for GPN.

GPN Financial Multiples

The stock has taken a beating since early August, which in turn opens a window of opportunity for investors to make a timely investment.

Based on current estimates, GPN trades at 20x current year earnings, 17x forward earnings, and 14.5x 2023 earnings.

This is a fair price for a good business with solid past performance, and favorable future tailwinds in a growing market.

However, a discounted cash flow forecast suggests upside to $223 per share.

Global Payments Investment Thesis Conclusion

The global technology sector has been under some pressure amidst intensifying supply chain challenges. The recent flare-up in Delta infections further strained global supply chains and stifled consumer spending. As a result, there’s been a slump in stocks of companies like GPN, irrespective of little exposure to the industry-wide headwinds, and the fact that the company offers strong long-term growth prospects.

It is expected that as global supply disruption fueling worries about inflation subsides and pressure alleviates, companies like GPN will have bright growth opportunities to look forward to. As such, the currently underperforming GPN stock (it has dipped 30% this year despite posting better than expected earnings growth) is expected to put up a solid show in 2022 and beyond.

In addition to ongoing synergies from the TSYS deal, Global Payments stands to derive some good business courtesy of the solid growth being witnessed by e-commerce, especially in the smaller-business vertical. The company can leverage its growing suite of proprietary cloud-based software offerings to drive share growth and share-of-wallet as well.

Moreover, with more and more banks trying to drive card revenue, the Issuer Solutions business is looking at a good addressable market opportunity as well.

Since August of last year, Global Payments has announced two major cloud partnerships – partnering the Issuer Solutions business with Amazon’s AWS and the Merchant Solutions business with Google Cloud.

GPN entered into a multi-year partnership with Google to deliver advanced cloud-based products and capabilities. Under the partnership, Global Payments will move its merchant acquiring technology to Google Cloud. It would help Google to extend its global market reach, by providing merchant acquiring services.

With Global Payments becoming a preferred provider for Google, some of the 3 billion or so transactions that Google does should go through Global Payments.

Global Payments will rely on AWS as its preferred cloud provider for issuer processing, a move that Global Payments management has said can increase its addressable market by 3x. Moreover, the move will also allow the company to offer more “a la carte” service options, allowing firms to “seamlessly operate” their card issuance.

Card revenue is an invaluable source of revenue for banks, and GPN’s move could help a large number of smaller banks currently deterred by the high cost of getting into the business, jump onto the bandwagon. This in turn will expand the addressable market opportunity for GPN.

M&A Deals To Resume

A series of prudent M&A deals has enabled Global Payments to build its own software business, which now contributes around 15% to its overall revenue. 

And with the pandemic subsiding, management has given enough hints about the resumption of big-ticket M&A activities.

This would be a good use of capital as offering vertical-specific software apart from driving its incremental revenue would also aid in further cementing its relationship with its customers.

The Outlook

The company delivered adjusted net revenue of $1.94 billion representing 28% growth, compared to the prior year and 10% growth, compared to 2019.

Adjusted operating margin for the second quarter was 41.8%, a 480-basis point improvement from the prior year, and the net result was adjusted earnings per share was $2.04 for the quarter, an increase of 56%, compared to the prior year, and a 35% improvement from the same period in 2019.

Encouraged by the strong showing, the management forecasted double-digit growth and improved profitability in 2021. The company announced a dividend hike of 28%, and also expanded the buyback authorization to $1.5 billion.

Analysts expect revenue growth of around 8% for GPN, which in turn could drive adequate cash flows to fund debt repayment, M&A, and capital returns to shareholders.

GPN Stock Forecast: The Bottom Line

The underlying premise of the Global Payments investment thesis is that the way payments are being made is undergoing a rapid transformation. The world is quickly moving away from cash and checks to electronic and online transactions.

The transition is in very early stages in the larger part of the globe, which in turn places Global Payments in a unique position to capitalize on the demand for modern payments solutions.

Additionally, GPN’s partnership with Google Cloud and AWS is likely to contribute towards lasting revenue growth, as it will allow it to create a cloud-based processing platform for card issuers and sharply ramp up its ability to offer new digital payments solutions to merchants around the globe.

All in all, when it comes to pure plays on the global payments technology theme, Global Payments offers itself as an ideal investment candidate. The company is all set to broaden its reach, its target addressable market for Issuer solutions is likely to triple, and the growth runway is long. At 19x forward earnings the valuation is of this global payments heavyweight is fair.

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