2023-03-28 09:51:04 ET
Summary
- This article discusses Greenlight Capital's recent investment in Global Payments and the possible reasons behind this move.
- This article analyzes the global payments sector including the impact of the COVID-19 pandemic, the recovery of the sector in 2021, and the trends that are shaping the industry.
- There are challenges and opportunities facing the sector, and Global Payments is adapting to these changes to position for growth.
Greenlight Capital, led by David Einhorn, had a stellar 2022 with the fund returning 36.6% net of fees and expenses compared to the 19% loss registered by the S&P 500 index. A few years ago, Mr. Einhorn and his investment strategy received backlash as the fund underperformed the market, but last year, Greenlight made a strong comeback as the macroeconomic environment turned favorable for the fund's strategy.
On the back of a blockbuster 2022, Greenlight Capital has made some interesting moves to position itself for a winning 2023. The fund boosted its stake in Global Payments Inc. ( GPN ) by over 70% in Q4 2022 by purchasing close to 200,000 additional shares. Global Payments now accounts for just over 3% of Greenlight's portfolio, which makes it the 9th largest holding of the fund.
Greenlight first invested in Global Payments in Q4 2021 at an average price of around $127. This initial investment, according to Greenlight's Q4 2021 shareholder letter , was based on a few reasons.
- Global Payments, according to Greenlight, benefits from inflation since it generally charges a percentage of merchant dollar volume.
- The company was attractively valued at the time.
- Greenlight believed that Global Payments was an attractive acquisition candidate for a disruptive tech company entering the fintech space.
In Q3 2022 - less than a year after its initial investment - Greenlight Capital trimmed its GPN stake by almost half, only to boost its stake in Q4 2022. With inflation now beginning to show signs of easing, Greenlight's decision to boost its GPN stake in the last quarter might have little to do with inflation this time around. The improving long-term macroeconomic environment for electronic payment processors and the seemingly attractive valuation could be at the center of Greenlight's investment in Global Payments. In addition, this investment decision might be indicative of a contrarian expectation for better-than-expected economic growth this year despite the increasing odds of a recession according to economists.
Well-Positioned For Growth
While many leading companies in the payments sector have seen their value decline by half or more in the last few years, Global Payments has lost just 10% of its market value in the last 5 years, aided by strategic business combinations and better-than-expected financial performance at the height of the pandemic. The company reported impressive financial results for the fourth quarter and for the full year, with 2022 revenue of $8.98 billion, representing a 5.2% year-over-year increase. The company's merchant business delivered 9% revenue growth, while its issuer business saw a 5% revenue growth. Notably, the issuer business produced its best performance since Global Payments' merger with TSYS in 2019, accelerating sequentially in the fourth quarter. Global Payments also demonstrated its commitment to creating value for its shareholders, returning over $3 billion in 2022 through stock repurchases and dividends.
Exhibit 1: Financial performance metrics
The global payments sector has experienced significant shifts and challenges over the past few years. Multiple factors have been driving these changes, including the COVID-19 pandemic, technological advancements, regulatory changes, and consumer preferences.
In 2020, the global payments sector took a hit due to the pandemic-related lockdowns and social distancing measures. This resulted in reduced economic activity and consumer spending, leading to a 5% drop in global payments revenues to $1.9 trillion. However, the impact was not uniform across regions and segments. While some markets like China and India saw a rebound, Europe and Latin America faced extended contractions. According to McKinsey Global Payments Report 2021 , India registered 25.6 billion transactions in 2020, a 70% increase over 2019, followed by China and South Korea. Furthermore, while card-based payments declined, digital payments gained popularity due to increased usage by consumers and merchants.
Exhibit 2: The performance of the global payments sector in 2020
The global payment sector bounced back strongly in 2021, with a rise in payments revenues by 11% to $2.1 trillion, surpassing pre-pandemic levels. This recovery was aided by the growing demand for electronic payments, particularly contactless and mobile payments, higher e-commerce and online platform penetration, and the popularity of new payment methods such as buy now pay later (BNPL) and embedded finance. Additionally, higher inflation and interest rates boosted margins for payment providers.
The global payment sector is poised for continued growth with several trends expected to influence the market, including the emergence of digital currencies and payment wallets. According to Statista, the Digital Payments segment is projected to reach $9.46 trillion in 2023, and the average transaction value per user is expected to increase notably in several payment categories.
Exhibit 3: Average transaction value per user
The global payment sector is going through a dynamic transformation, which demands companies to rethink their business model by upgrading their strategies, technological capabilities, and partnerships.
Global Payments has acknowledged the need for change and the company has launched several initiatives to position itself as a long-term winner of favorable macroeconomic expectations for the payments sector. In February, the company announced that it had entered into a new deal with the Atlanta Hawks and Atlanta Braves sports teams, marking a significant expansion of its operational presence. The new deal is a significant step towards expanding Global Payments' operational presence and demonstrates the company's ability to continue growing despite the challenges that have affected the payments sector in recent years. Under the agreement, the company will provide its advanced cloud-based software and payment solutions to Truist Park and State Farm Arena, aiming to enhance both the fan experience and operational efficiency of the venues. The deal strengthens the company's commitment to Georgia, as it now serves as the Commerce Technology Provider for all of Atlanta's major sports and entertainment venues. The partnership will leverage Global Payments' expertise in food and beverage services management, ticketing, and retail to provide seamless, digital, and in-person interactions for fans. The technology integrations with both teams are scheduled to start in the first quarter of 2023. This deal is expected to provide new opportunities for growth, further solidifying the company's position in the market.
The company's acquisition of EVO Payments is expected to close in March as well, providing opportunities for significant growth and expansion in new and existing markets while enhancing its leadership in integrated payments globally, and augmenting its business-to-business software and payment solutions. GPN also divested Netspend's consumer business and entered into a definitive agreement to sell its Gaming Solutions business to Parthenon Capital Partners for $415 million. With these initiatives, the company is refining its portfolio to prioritize corporate clients over consumer-centric businesses.
The international expansion of the company is also opening new doors for the company to grow. Global Payments has a meaningful presence in several European markets and the Asia-Pacific region. The latter is seen as one of the fastest-growing markets in the payments sector, and historically, Global Payments has enjoyed higher margins in these fast-growing, emerging markets.
Global Payments, in my opinion, will enjoy scale advantages in the coming years as the company establishes its presence in key markets around the world, aided by recent strategic acquisitions. These scale advantages will enable the company to earn economic profits in the foreseeable future as the company does not incur substantial incremental costs with an increase in the number of transactions handled.
Although Global Payments is well-positioned to thrive amid favorable long-term payment trends, investors will have to keep a close eye on the looming threat of a recession as a notable downturn in business activity will negatively impact the company's earnings. Global Payments is likely to underperform its larger peers in a recessionary environment because of its focus on small businesses.
Takeaway
David Einhorn's Greenlight Capital recently boosted its stake in Global Payments, and I believe GPN is a contrarian bet on better-than-expected economic growth this year. Long-term industry trends are favorable for Global Payments, and the company has the potential to scale profitably.
For further details see:
Global Payments: A Contrarian Play By David Einhorn