Global Payments Inc.: A bread-and-butter Fintech worth keeping in your fridge
Over the past year, Global Payments Inc. (
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GPN – $0. 2.08 (1.879%) ) fell by almost 20%, reflecting a year characterized by a bloodbath for all fintech companies. Rising interest rates and the setbacks from the Covid-induced economic downturn were largely to blame for the trend, and GPN was not immune. But even with these headwinds, the company has maintained strong fundamentals and delivered a good product. The reward has been an attractive valuation, and continued attention from fintech watchers everywhere.
GPN specializes in cross-web, mobile and point-of-sale payments – with basic solutions for simple e-commerce. As an example, the company offers a ready-made payment page for a business website or app that is PCI compliant out of the box. GPN also sells the popular PayLink solution, which enables business customers to send a unique payment link via SMS, WhatsApp or email to receive instant payments, an incredibly useful service for the ‘gig economy’.
Bundled payments is a fast-growing category, as brick-and-mortar retailers continue to strengthen their online presence and take steps to merge offline and online operations. And GPN’s cloud-connected point-of-sale hardware for brick-and-mortar merchants manages clients like Atlanta’s Mercedes-Benz Stadium. These systems include customer loyalty program management.
Solid basics
GPN reported $2.02 billion in revenue and $2.42 EPS. Overall, 2022 revenue was $8.09 billion, representing a 7% year-over-year increase. The company’s annual EPS was $9.32, up 17% year over year. Furthermore, the adjusted operating margin for the full year improved by 190 basis points to 43.7%. Among individual segments, e-commerce and omnichannel commerce were the highlights. And revenue from issuer solutions increased 2.3% year over year, rising to $582.6 million. But consumer solutions fell 18.6% to $142.4 million, as SMBs were hit hard by the slowing economy.
GPN did an excellent job of cost control for the quarter. Service costs fell 4.1% year over year to $927.9 million. As a result, gross profit increased by over 8%, to $1.33 billion. Gross profit margin was 58.8% compared to 56.2%, up 260 basis points. SG&A (selling, general and administrative) expenses were also only up 1.6%. This resulted in operating income increasing by a whopping 27% to 407.6 million dollars.
Downwind
As companies look to modernize their finance operations with new internet and cloud technologies, GPN is poised to take advantage. It is now well known that the pandemic permanently advanced digital payment adoption: the payments industry has already seen fantastic growth, which is reflected in the expected 14.3% CAGR. Using this figure, GPN will be worth over $227 billion by 2028.
Although virtually all companies are at risk in the event of some degree of economic downturn, we believe that GPN is significantly more recession-proof. Much of its revenue is recurring, as it sells subscriptions to merchants and financial institutions to use the software. Still, a large portion of the business also comes from taking a percentage of each transaction, meaning reduced sales from customers will hit GPN’s top line in the short term.
Still, the company’s balance sheet is likely to remain very strong. Since GPN has a credit facility of $5.75 billion that is completely undrawn. Net gearing is 3.02x and it has a current ratio of 0.92, making it one of the most solvent companies on the market.
Risks
Although a majority of GPN’s business comes from US clients, it has an extensive clientele in the UK and elsewhere. As our readers may already know, such markets are experiencing extreme currency devaluation against the dollar – especially the pound, losing almost 13% against the dollar in the past year. The UK’s economic woes are further exacerbated by a recently reported inflation rate of 10.1% which is further damaging GPN’s customer base there. Similar trends are seen in the eurozone and other markets, albeit to a lesser extent. These issues were cited by GPN as serious headwinds, and have already dampened an otherwise exceptional quarter.
Valuation
We performed a diluted cash flow analysis with an 11% discount rate, 3% terminal growth rate and 10% free cash flow growth. This should be reasonable, as global payments have achieved double digital FCF growth in recent years, and once again the overall market is expected to grow at 14.9% CAGR.
GPN has demonstrated strong fundamentals and a robust business model that has delivered results, especially in recent quarters. A diverse portfolio of B2B products in sectors expected to grow at extremely high rates while remaining recession-proof is a strong tailwind that inspires confidence. We believe currency risk is short-term.
