The Street Has Hung Up on VeriFone

NEW YORK ( TheStreet) -- It's really interesting to see how the Street has finally caught on to the nightmare that VeriFone ( PAY) has become.

Research firm Zack's just downgraded the company to "strong sell." While I don't disagree with this sentiment, it comes exactly nine months after I warned investors that VeriFone was a disaster in the making.

Last week, after VeriFone reported a brutal second-quarter earnings report, the analyst community was forced to the point where they had to say "enough is enough." I say "forced" because it seems as if their hands were tied. For one reason or another, investors have always wanted to like this stock despite overwhelming evidence suggesting they shouldn't.

The fact that shares of VeriFone were up over 20% from the low serves as a perfect example. This came amid concerns about emerging mobile threats from the likes of Square and Intuit ( INTU), which has also begun to threaten VeriFone's value-added payment services.

Making matters worse, there's Apple ( APPL), whose next iPhone is expected to be equipped with fingerprint scanning and an eWallet, which is broadly presumed as the nail in VeriFone's coffin.

Last but certainly not least, there's still that small bit of detail regarding the CEO -- the company doesn't have one. The post has been vacant for three months. No one seems to want the job.

With the stock making new 52-week lows in what seems as every other session, investors want to know if is it time to jump in. I don't believe it is. Given the results of its recent quarter, this situation may possibly get worse before it gets better.

Given the many challenges the company was dealing with, expectations were already low. But not only did VeriFone miss revenue and earnings-per-share estimates, but management issued guidance that killed any silver linings that were in sight. It doesn't appear as if growth will be seen during this fiscal year.

The company reported second-quarter revenue of $426.3 million, which was down 9.7% year over year and down roughly 1% sequentially. The company saw a 19% decline in its systems solutions revenue, which offset a decent performance in the company's service revenue, which was up 14%.

Investors at one point insisted on giving VeriFone the benefit of the doubt, while blaming the soft macro climate as the main culprit. I would accept this excuse for one or two quarters. But how then do you explain that one of VeriFone's main rivals, Ingenico ( INGIY), is performing so well?

Ingenico is coming off a strong quarter where revenue climbed 24%. These two are competing for the same market share. It's certainly unbeatable that Ingenico is gaining share at VeriFone's expense, especially in regions such as North America and Latin America where VeriFone saw its revenue decline by 5% and 14%, respectively.

While rivals are eating away VeriFone's business, the company is also seeing continued leverage erosion -- gross margin fell 4.5% to 36.2%. Likewise, operating margin declined by almost 6%, leading to 34% decline in net income. Where does VeriFone turn to next? Thing aren't expected to get better.

Management has guided for third-quarter revenue of $400 million, which suggests almost a 20% year-over-year decline, while non-GAAP earnings of 20 cents per share represents almost a 70% decline. The Street hated the outlook and punished the stock for it. Unfortunately, it's just a bit too late. The stock has now lost more than 50% since I recommended it as a sell.

Although the valuation looks interesting here, I would be careful about catching this falling knife. There are still stubborn investors in this stock wanting to be proven right. However, this is one of those situations where it is better to just cut your losses and move on.

I'm not discounting that another company can step in and make a bid for VeriFone. But that's a pretty big bet. I don't believe the company can be an attractive asset, especially when it can't seem to save itself from the proliferation of mobile payment alternatives.

Does VerfiFone have the ability to turn things around? I believe it does. But it still doesn't make the stock a buy today. The Street finally looks ready to hang up on the idea that the company can remain viable. I agree. But I also feel the conversation regarding VeriFone's value has gone over the limit.

At the time of publication, the author had a position in Apple.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.