Apple Pay Takes On Hackers, Cash
For years, technology companies have set their sights on the payment industry, with each firm wanting a slice of the digital wallet. So Apple aapl 0.3720309071830583% Apple Inc. U.S.: Nasdaq USD105.22 0.39 0.3720309071830583% /Date(1414184400783-0500)/ Volume (Delayed 15m) : 44146218 AFTER HOURS USD105.25 0.03 0.028511689792815053% Volume (Delayed 15m) : 2907698 P/E Ratio 16.25195001776254 Market Cap 617237481555.373 Dividend Yield 1.7867325603497435% Rev. per Employee 2276400 More quote details and news » ’s plan to partner with the industry’s most established names— Visa v -0.3733432891543774% VISA Inc. Cl A U.S.: NYSE USD213.48 -0.8 -0.3733432891543774% /Date(1414184459965-0500)/ Volume (Delayed 15m) : 2703668 AFTER HOURS USD213.5 0.02 0.00936855911560802% Volume (Delayed 15m) : 22409 P/E Ratio 24.373758363208733 Market Cap 133526448089.578 Dividend Yield 0.8993816750983699% Rev. per Employee 1310110 More quote details and news » (ticker: V), MasterCard, ma -0.12147388311513024% MasterCard Inc. Cl A U.S.: NYSE USD74 -0.09 -0.12147388311513024% /Date(1414184656477-0500)/ Volume (Delayed 15m) : 3333903 AFTER HOURS USD74.15 0.15 0.20270270270270271% Volume (Delayed 15m) : 40491 P/E Ratio 26.618705035971225 Market Cap 85794046554.6799 Dividend Yield 0.5945945945945946% Rev. per Employee 1084510 More quote details and news » (MA) and American Express axp 0.922789393762411% American Express Co. U.S.: NYSE USD86.4 0.79 0.922789393762411% /Date(1414184407607-0500)/ Volume (Delayed 15m) : 3538261 AFTER HOURS USD86.3 -0.1 -0.11574074074074074% Volume (Delayed 15m) : 69731 P/E Ratio 15.970425138632162 Market Cap 89424001579.2847 Dividend Yield 1.2037037037037037% Rev. per Employee 565510 More quote details and news » (AXP)—came as a surprise when it emerged last month. Apple Pay, officially launched last week, is essentially a high-tech way to access traditional cards issued by big banks. For Visa and MasterCard, it’s just one more conduit to their dominant electronic networks.
Despite the efforts of eBay EBAY 0.6497341996455995% eBay Inc. U.S.: Nasdaq USD51.12 0.33 0.6497341996455995% /Date(1414184400523-0500)/ Volume (Delayed 15m) : 6336077 AFTER HOURS USD51.27 0.15 0.2934272300469484% Volume (Delayed 15m) : 51470 P/E Ratio N/A Market Cap 63509796817.5402 Dividend Yield N/A Rev. per Employee 524776 More quote details and news » (EBAY) and Google GOOGL -0.8579427436105843% Google Inc. Cl A U.S.: Nasdaq USD548.9 -4.75 -0.8579427436105843% /Date(1414184400209-0500)/ Volume (Delayed 15m) : 2157019 AFTER HOURS USD549.28 0.38 0.06922936782656222% Volume (Delayed 15m) : 18748 P/E Ratio 28.290168792681357 Market Cap 369212024825.01 Dividend Yield N/A Rev. per Employee 1355620 More quote details and news » (GOOGL) and start-ups like Square, Silicon Valley couldn’t blow up the traditional ecosystem.
“Early adopters in the [digital] space have learned the hard way,” says Jim McCarthy, Visa’s head of innovation and strategic partnerships. “Payments are just hard.”
Apple’s embrace should give long-term investors confidence about Visa and MasterCard’s highly profitable networks. The companies themselves are clearly proud about bringing Apple (AAPL) into the fold: “We feel that it’s a huge validation of our strategy and of the tech choices that we’ve made,” says James Anderson, MasterCard’s senior vice president for mobile and emerging payments.
Apple Pay could spawn other winners, as well, including VeriFone Systems pay 1.0572687224669604% VeriFone Systems Inc. U.S.: NYSE USD34.41 0.36 1.0572687224669604% /Date(1414184693650-0500)/ Volume (Delayed 15m) : 728974 AFTER HOURS USD36.34 1.93 5.608834641092706% Volume (Delayed 15m) : 87808 P/E Ratio N/A Market Cap 3890325716.54388 Dividend Yield N/A Rev. per Employee 317529 More quote details and news » (PAY), which makes payment terminals; NXP Semiconductors nxpi 2.1034590215020255% NXP Semiconductors N.V. U.S.: Nasdaq USD65.53 1.35 2.1034590215020255% /Date(1414184400059-0500)/ Volume (Delayed 15m) : 3879020 AFTER HOURS USD65.85 0.32 0.48832595757668246% Volume (Delayed 15m) : 10702 P/E Ratio 78.01190476190476 Market Cap 15317712265.8289 Dividend Yield N/A Rev. per Employee 199953 More quote details and news » (NXPI), which makes the chips powering the Apple technology; and Synaptics syna -15.238160229288932% Synaptics Inc. U.S.: Nasdaq USD62.105 -11.165 -15.238160229288932% /Date(1414184400096-0500)/ Volume (Delayed 15m) : 6147134 AFTER HOURS USD62.1201 0.0151 0.02431366234602689% Volume (Delayed 15m) : 15902 P/E Ratio 58.589622641509436 Market Cap 2960916341.28906 Dividend Yield N/A Rev. per Employee 1112130 More quote details and news » (SYNA), a maker of fingerprint sensors for mobile phones.
Shares of MasterCard and Visa aren’t cheap, but the stocks have always traded at a premium to the broad market. Even at 21 times earnings for the next 12 months, MasterCard looks reasonable, especially with earnings set to grow 19% in each of the next two years. MasterCard shares could gain 15% next year given earnings growth—even if the multiple falls slightly. Visa fetches a similar multiple with slightly lower growth prospects. The stocks generally trade in tandem.
The networks say that Apple Pay does nothing to change the economics of their business. But any technology that pushes consumers to abandon cash is a long-term positive for Visa and MasterCard. Barron’s outlined the enduring opportunity in a cover story two years ago (“The End of Cash?” Dec. 31, 2012). This year, MasterCard’s revenue is forecast to grow 13%, to $ 9.4 billion, with Visa revenue probably up 8%, to $ 12.7 billion.
Apple hasn’t disclosed details, but The Wall Street Journal reported that Apple will receive a fee from banks for every Apple Pay transaction. Even so, payments won’t soon move the needle for Apple; the tech giant had fiscal 2014 sales of $ 183 billion.
APPLE PAY COULD, THOUGH, SPUR a new wave of payment-equipment upgrades. Merchants are wary about being the next Target or Home Depot. Those chains were victims of hacker attacks in the past year that exposed nearly 100 million credit and debit cards. The breach led to the resignation of Target’s CEO. A technology like Apple Pay wouldn’t have stopped the attacks, but it would have made the data obtained by hackers basically useless (see “Taking Apple Pay for a Spin,” Gadget of the Week).
Apple Pay Winners
Credit-card companies, payments infrastructure, and component makers stand to gain.
|Company / Ticker||Recent Price||Market Val (bil)||P/E*|
|Visa / V||$ 213.48||$ 133.0||20.4|
|MasterCard / MA||74.00||85.7||21.4|
|NXP Semiconductor / NXPI||65.53||15.6||12.2|
|VeriFone Systems / PAY||34.41||3.9||17.4|
|Synaptics / SYNA||62.11||2.3||10.9|
|*Based on next 12 months’ estimated earnings||Source: FactSet|
As merchants step up their payment security, VeriFone Systems, which has about a 60% share of retail payment terminals in the U.S., will get a big piece of the pie. After a blip last year, sales are likely to grow 9%, to $ 1.9 billion in the fiscal year that ends this month. They should continue to grow as retailers move to newer terminals that support near field communication, or NFC, as well as new standards for chip-enabled credit cards.
Sterne Agee analyst Vijay Rakesh thinks Apple Pay and other mobile-pay systems could drive up to $ 700 million in new annual revenue for chip maker NXP. The company makes the NFC radio in the iPhone 6 and 6 Plus, along with the “secure element” that stores payment data on the phone. This year, revenue could reach $ 5.6 billion, up 17%, with net income climbing 41%, to $ 1.2 billion. At just 12 times forward earnings, the stock is cheap relative to growth. Rakesh has a price target of $ 82 on NXP, 25% above the recent close.
Some industry observers think the bigger opportunity for Apple Pay is in e-commerce transactions; the system allows owners of the latest iPhones and iPads to make payments inside compatible apps. For security, Apple Pay uses a fingerprint reader, which Apple builds in-house.
Synaptics builds similar sensors for Samsung and others. As demand grows for mobile fingerprint authentication, Synaptics will be a beneficiary. Barron’s recently forecast gains of 35% for the stock (“Synaptics Has the Right Touch,” Sept. 1). The stock sold off last week after earnings missed expectations, but the long-term story hasn’t changed.
Apple Pay won’t change shopping habits overnight. Visa’s McCarthy points out that ATMs and debit cards took seven to 12 years to reach widespread acceptance. He thinks Apple Pay will move faster, taking three to five years to reach the mainstream. Notes McCarthy: “There’s been pent-up demand for third parties to make payments work better.”