Verifone takes an NFC stock beating, perhaps unfairly

Verifone takes an NFC stock beating, perhaps unfairly, due to unrealistic market expectations

We all know who Verifone is if we are interested in NFC mobile wallets and NFC payments. They are undoubtedly the largest player in the NFC point-of-sale business globally, and they are involved in most NFC payment projects on some level in the very complex ecosystem. However, Verifone has recently taken a painful beating on its stock price, which we can see between December 5th, when it traded at $44 a share, to December 14th, when it had fallen to just $35 per share. Ouch! Their fourth quarter earnings call wasn’t even until December 14th, so something is happening in the perception of Verifone’s viability to turn a profit. We are not going to go into P/E growth and other associated investment indicators in this post; we want to concentrate more on why this has happened to Verifone versus the reality of the situation. This perception that investors are adopting also has larger scale impacts on the rest of the NFC industry and Verifone may just be the fall guy that kicks off something grander in scale.

Shrinking margins is the official reason given by investors for the exodus and dropping of the stock, but there is far more than that going on. It is all about unrealistic impressions of NFC and how quickly ubiquity is going to happen.

First things first, Verifone does not control many key parts of the nascent industry. It doesn’t affect how ISIS is holding NFC payments back here in the United States and it has no control on which OEMs include NFC in their handsets. Moreover, the lack of support or slow adoption for EMV is also beyond its control. Another hurdle faced by the firm is that Apple didn’t include NFC support in its iPhone 4S and PayPal has thus far steered away and debunked the technology. Investors expected the process of NFC ubiquity to happen fast and that hasn’t happened. In fact, that was never going to happen, because like building the roads in the United States, changing all POS terminals out for NFC cousins is part of a change that will take a few years to fully happen. This is what most frustration is about in NFC these days. Gone are the questions of will NFC take off, and now the question hangs around the when. And Verifone appears to have become a victim of impatient investors.

What Verifone does have in its favor is that it is primed to take pole position in the hardware and software deployments of NFC POS terminals, loyalty programs and other integrations. 2012 is the year of NFC payments and Verifone will take a lion’s share of that market. As more and more consumers become aware of the capabilities NFC brings to their lives, the demand from merchants will increase at consummate levels.

We hear everyday about NFC startups who are struggling for operating cash even though their business models are sound. Most are waiting for more NFC smartphones to hit the market and for Isis group members to enable NFC in those phones. Investors are leery to invest in firms in this situation because the big unknown is time and ubiquity – both issues that make the size of a potential market an unknown quantity.

This really is small thinking on the part of investors because more NFC smartphones are becoming available, ISIS is feeling the pressure from Google having its Google Wallet in the market, and those same MNOs are involved in a private battle with each other and won’t allow any particular network to become known as the home of NFC enabled smartphones. NFC will become ubiquitous in more than payments but it is going to take some time. This makes it a perfect time to invest in NFC firms while they are in startup survival mode, rather than a time to treat them like they have the plague.

Verifone earnings calls may have excited investors too much and led to them losing faith in the NFC near term future

CEO, Douglas Bergeron, may not have helped the Verifone situation on earnings calls. Of course, to us in the industry we recognize that everything said by Bergeron are very positive signs, but investors are a lot more impatient than us and expect any news that is released in the on-demand world to take immediate effect. The shrinking margins are to be expected. Verifone has made acquisitions in the last year and has also had to retool itself for NFC point-of-sale terminal and software services industry. It seems obvious to us that the setting up of this infrastructure takes time and money and we do not see that as a long term reality for the firm. See below the statements Bergeron made about its NFC side of the business and make your own conclusions.

Verifone Q2 earnings call referring to NFC

“We recently announced that we are partnering with Google (GOOG) and top retailers to deploy a new NFC-based mobile payment system for trial use throughout the U.S. The trials are occurring at major retailers including American Eagle Outfitters (AEO), Foot Locker (FL), Macy’s (M) and Toys “R” Us. Google and retailers are using VeriFone’s Near Field Communication-enabled point-of-sale systems to power more engaging consumer-friendly transactions. Our retail presence, security infrastructure and brand recognition is key to the success of the NFC offering. If these trials lead to wide-scale deployment across the industry, we expect a boost to our growth for the next several years by $100 million to $150 million per year in the U.S. and even more internationally.”

Verifone Q3 earnings call referring to NFC

“Visa’s (V) recently announced plan to accelerate the migration to EMV contact and contactless chip technology in the U.S., combined with the industry’s interest in deploying NFC technologies, creates a unique situation that may stimulate and accelerate terminal upgrade cycles. It’s too early to predict what other card networks will do. But directionally, this could mean a complete product refresh over the next several years, representing hundreds of millions of dollars of business.”

Verifone Q4 earnings call referring to NFC

“We continue to make great progress on our strategic relationships. Google, is now live in approximately 40,000 VeriFone lanes across the country. VeriFone has upgraded each of these lanes, with NFC functionality and sold the VeriFone Google application and interfaces at each live location. VeriFone has proven invaluable in the Google Wallet initiative, delivering 12 of the 13 of the SingleTap merchants listed on the Google Wallet website … We also continue to work very closely with AT&T (T), T-Mobile and Verizon’s (VZ) payment joint venture called Isis, to support their 2012 pilot plans, as well as scaling to support their national rollout. In addition, PayPal is going extremely well, as we are actively engaging merchants and collaborating with PayPal in how we can support their 2012 objectives.”

Between Google Wallet, which is already in the market and gaining more traction everyday, future partnerships with PayPal and the controlling ISIS, Verifone looks set for unprecedented success in the next few years.

In conclusion, it isn’t as if Verifone isn’t making great inroads into the NFC payments industry. It isn’t as if they aren’t gearing up for massive deployments this next year. It isn’t even as if in interviews we have seen that the CEO, Douglas Bergeron, hasn’t taken a tempered approach to ubiquity and deployment.

Verifone has a big 2012, 2013 and 2014 to come. If Verifone stock is trading anywhere below $40 per share, it is undervalued and represents a bargain in our (uneducated) opinion. It is becoming apparent that impatient investors should move along and try their luck elsewhere. Verifone may have taken a beating now for the NFC payments industry’s slow deployment of services, but only a fool would think that Verifone is a bad mid to long term investment. At the end of the day, who you invest in is up to you and you take the risks. We are far from giving investment advice. We find it more interesting how nothing more than a perception can affect a company the size of Verifone so greatly and how this has been the story of NFC so far.

Unrealistic expectations are rife in the NFC industry and harm the contiguous development and deployment from smaller firms. Verifone have the luxury of reserves to ride out this storm in a tea cup. Verifone has its day in the sun with NFC to come, other smaller startups may not be as lucky.