V - Global Payments Q4 Earnings: An Undervalued Fintech Play

Summary

• Global Payments Inc. is now trading nearly 50% below its all-time high.
• The company has been benefiting from digital transformation, and the tailwinds should continue to fuel growth.
• Global Payments Inc. Q4 earnings were impressive, as operating income increased significantly despite soft revenue growth.
• Its current valuation is compelling with multiples meaningfully below its historical averages.
• I rate Global Payments Inc. as a buy.

Investment Thesis

Global Payments Inc. ( GPN ) may not be a household name, but it actually plays an important role in the fintech space. Thanks to the acceleration in digital transformation in the past decade, the company was up over 350% during the period, comfortable outpacing the broader indexes.

However, its performance has been sluggish in the past two years, and it is currently trading nearly 50% below its all-time from 2021. I believe this is a good bottom-fishing opportunity for investors, as the company’s fundamentals are still strong. The market opportunity remains huge and secular tailwinds should continue to fuel growth. The latest earnings result was also very solid considering the macro environment. After the decline in share price, Global Payments Inc.'s current valuation is very attractive as multiples are way below peers and its own historical averages. I like the upside potential here, therefore I rate Global Payments Inc. as a buy.

Why Global Payments?

Global Payments Inc. is a leading payment technology company that provides software and services to merchants and businesses. Its main goal is to help customers accept and process payments. It is divided into three segments which include merchant solutions, issuer solutions, and business & consumer solutions. Merchant solutions offer products for POS (point of sale), e-commerce, mobile payments, loyalty program, and more. Issuer solutions help customers issue credit, debit, or prepaid cards alongside payment partners like Mastercard ( MA ) and Visa ( V ). While business & consumer solutions offer products such as accounts payable automation, virtual cards, analytics, and more. The company’s existing customers include big names like Starbucks ( SBUX ), Volkswagen ( VWAGY ), H&M ( HNNMY ), etc.

Global Payments. has huge market opportunities. According to Allied Market Research , the TAM (total addressable market) for fintech is forecasted to grow from $110.57 billion in 2020 to $698.48 billion in 2030, representing a CAGR (compounded annual growth rate) of 20.3%. Fintech is one of the biggest trends in digital transformation. The adoption rate of digital payments has been growing exponentially in the past few years, and the pandemic further boosted it as everyone is forced to stay at home. The rise of new industries such as e-commerce, ride-sharing, food delivery, etc. has also increased the usage of digital payments. There are also a ton of alternative payment methods emerging, such as virtual cards and BNPL (buy now, pay later), which increases the overall transaction volume for the fintech space. I believe the fintech market will continue to grow quickly which should provide tailwinds for the company.

Q4 Earnings

Global Payments just reported its fourth-quarter earnings , and the results are solid considering the macro headwinds. Revenue growth was soft, but the bottom line growth was very impressive. The company reported revenue of $2.25 billion, up 2.7% YoY (year over year) from $2.19 billion. On a constant currency basis, revenue was up 4%. The growth was mainly driven by merchant solutions, which saw revenue increase 5.3% YoY from $1.48 billion to $1.55 billion, now accounting for 68.9% of total revenue. Within the segment, e-commerce and omnichannel commerce were the highlights, with mid-teens growth. Issuer solutions revenue was up 2.3% YoY from $569.6 million to $582.6 million while consumer solutions revenue was down 18.6% YoY from $175 million to $142.4 million, as SMBs (small and medium businesses) were heavily impacted by the slowing economy.

The company did an excellent job on costs and expense control for this quarter. The cost of service went down 4.1% YoY from $968 million to $927.9 million. This caused gross profit to increase by over 8% YoY from $1.23 billion to $1.33 billion. The 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% YoY from $905 million to $919.5 million. This resulted in operating income up a whopping 27% from $321 million to $407.6 million. Operating margins widened significantly from 14.6% to 18.1%. EPS was $0.93 compared to $0.72, up 29.2% YoY. The company also initiated FY23 guidance which represents revenue growth to be roughly 6%-7% while EPS growth should be 10% to 11%. This is very upbeat as it suggests a re-acceleration in top-line growth.

This quarter showed the importance of great management. Despite revenue growth being weak due to lower spending, Global Payments Inc. still managed to post strong bottom-line growth thanks to timely cost-cutting initiatives.

Investors Takeaway

I think Global Payments Inc. is a solid value play. Digital transformation will only continue to accelerate and fintech will remain a huge part of it. The market opportunity is massive and the company should benefit from the ongoing tailwinds. After the huge decline in share price, the company’s valuation is looking really attractive. It is currently trading at an fwd EV/EBITDA ratio of 10.22x which is very cheap (I am using the EV/EBITDA ratio as it can take the company’s large debt load into account).

This is meaningfully below other fintech companies such as Fiserv ( FISV ), Visa, and Mastercard, which have an average EV/EBITDA of 19.16x. This represents a significant premium of 87.4%. On a historical basis, it is also trading at a 38.9% discount compared to its 5-year average EV/EBITDA of 16.73x. The company’s recent financial results are solid. Revenue growth is soft but according to guidance, this will normalize in the coming year. Bottom-line growth continues to be strong despite headwinds and a long-term EPS CAGR of 10%+ is definitely achievable.

I believe a lot of negativity is already reflected in the current valuation of Global Payments Inc., yet upside potential is still being overlooked. This offers a great risk-to-reward ratio. Therefore, I rate Global Payments Inc. as a buy.

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