Digital Wallet Adoption Will Erode Legacy Systems

Key Takeaways

• Rapid industry shifts toward alternative payment methods and industry consolidation threaten Tyro's relevance, market share, and long-term revenue prospects.
  
• Increasing regulatory demands and a costly fixed cost structure heighten profitability risk, especially given Tyro's reliance on economically sensitive small business clients.
  
• Broader adoption of digital payments, expanded market reach, new banking services, operational efficiency, and acquisition interest are reinforcing Tyro's growth and profitability outlook.

Catalysts

Engages in the provision of payment solutions and value-add services in Australia.

• The rapid migration towards direct account-to-account payments, digital wallets, and embedded finance threatens to substantially erode the relevance and growth of Tyro's core payment terminal business over the long term, which could undermine revenue expansion as merchants shift to newer payment channels that do not require Tyro's infrastructure.
  
• Heightened regulatory complexity and rising compliance burdens related to data privacy, fraud prevention, and payment processing are expected to drive ongoing increases in operating costs, compressing net margins and pressuring profitability as Tyro must constantly adapt its systems and processes.
  
• The ongoing consolidation of the global payments industry risks creating a highly concentrated landscape dominated by large multinational players, reducing Tyro's ability to win new market share and making it vulnerable to being outcompeted or marginalized-limiting sustainable long-term revenue and profit growth.
  
• Despite recent operational efficiency improvements, Tyro's high fixed cost base and the constant requirement for significant technology investment to stay competitive increase the risk that expense growth will outpace revenue gains, eventually putting sustained downward pressure on both margins and earnings.
  
• With a core customer profile focused on small
• and medium-sized businesses that are acutely sensitive to economic downturns and market disruption, Tyro faces greater exposure to revenue volatility, higher merchant churn, and weaker through-cycle earnings stability compared to more diversified or global competitors.

Tyro Payments Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tyro Payments compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tyro Payments's revenue will grow by 2.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.7% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach A$18.1 million (and earnings per share of A$0.03) by about August 2028, up from A$17.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.3x on those 2028 earnings, down from 35.3x today. This future PE is greater than the current PE for the AU Diversified Financial industry at 25.2x.
• Analysts expect the number of shares outstanding to grow by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

Tyro Payments Future Earnings Per Share Growth

Risks

• The ongoing shift from cash to digital payments and the accelerating transition to contactless and mobile payment methods are driving broader merchant and consumer adoption, supporting higher transaction volumes and payment processing demand which can maintain or grow Tyro's top-line revenue.
  
• Expansion into new verticals such as automotive, pet insurance, aged care, and unattended devices, as well as deeper penetration into healthcare sub-segments with low market share, offers a significantly increased addressable market, enhancing Tyro's growth opportunities and supporting sustainable revenue gains over the long term.
  
• Successful rollout of value-added banking services, including the new core banking platform and increased adoption of merchant lending products, enables Tyro to unlock higher customer lifetime value and diversify its gross profit streams, positively impacting both gross profit and margins.
  
• Demonstrated improvements in operational efficiency, with operating expenses growing much slower than gross profit and AI adoption streamlining support and product development, have translated into rising EBITDA margins-from 7.2% to 28% in three years-showing a clear company trend toward profitability improvements and stronger earnings trajectory.
  
• Active pursuit of strategic partnerships and acquisitions, coupled with unsolicited bids reflecting external interest in Tyro's business, highlight Tyro's potential as either an acquirer or an attractive acquisition target, which could result in value creation for shareholders and support future share price appreciation.

Valuation

• The assumed bearish price target for Tyro Payments is A$0.82, which represents two standard deviations below the consensus price target of A$1.35. This valuation is based on what can be assumed as the expectations of Tyro Payments's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.7, and the most bearish reporting a price target of just A$0.82.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$522.7 million, earnings will come to A$18.1 million, and it would be trading on a PE ratio of 30.3x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of A$1.19, the bearish analyst price target of A$0.82 is 45.0% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.