VeriFone, an Electronic Payments Early Success, Looks Flat-Footed Now

NEW YORK (Real Money) -- Shares of VeriFone (PAY), which reports earnings after the market closes Thursday, have been steadily rising since mid-March. The company is the electronic-payments space's 800-pound gorilla, but dozens of Silicon Valley start-ups are working feverishly to disrupt its business.

VeriFone was holding its own as recently as 2012, when revenue grew by 45% as many of its accounts upgraded. But the company has been caught off guard since then as the use of mobile and cloud-based payments have accelerated. Cloud services like Square and Stripe are taking hold, while mobile payments through apps like Uber's are eating into VeriFone's taxi-terminal business.

VeriFone has been left flat-footed and doesn't appear to have much of an answer to these rival products. Fiscal 2013 was a disaster, with revenue falling 9%. Revenue bounced back 9% in 2014, but VeriFone's business still isn't where it needs to be.

This year looks to be another tough one for the company. Analysts are expecting second-quarter revenue to rise 4.7% to $488.9 million as earnings per share hit 42 cents. Market watchers expect revenue for the year to grow 7% to $1.998 billion and EPS to total $1.83.

To me, VeriFone is stuck in the past. The company dominates the credit-card terminal sector, but that's a slow-growth business. Mobile electronic-payment volumes are expected to exceed $37 billion this year, but that benefits Apple (AAPL) and the Google (GOOG) (GOOGL) Android operating environments.

As for e-commerce, that's dominated by PayPal, an eBay (EBAY) subsidiary. VeriFone is left selling terminals to Third World gas stations and hoping that supermarkets upgrade their equipment.

The company has spent the last two years cutting costs and re-engineering its product portfolio. Management has added e-commerce and a cloud offering, and Wall Street believes these changes will allow VeriFone to grow again. But the consensus is modeling just 8% or 9% revenue growth in fiscal 2016 and 2017. That's not much more than the 7% expected this year.

For now, I'll stay on the sidelines until I see higher top-line growth.

Editor's Note: This article was originally published on Real Money at 10 a.m. EST on June 4.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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