ProFac And PayFabric Drive Revenue Surge Amid Expanding Digital B2B Transactions

Key Takeaways

• ProFac's launch and its significant merchant adoption highlight a strong growth catalyst by expanding merchant usage and impacting revenue positively.
  
• Strategic European acquisitions and Commerz Globalpay launch point to potential for increased market penetration in Europe, impacting future revenue and market share growth.
  
• Market and technological challenges coupled with regulatory risks may hinder Global Payments' revenue growth and competitive position in payment solutions.

Catalysts

Provides payment technology and software solutions for card, check, and digital-based payments in the Americas, Europe, and the Asia-Pacific.

• The launch of the progressive payment facilitation solution, or ProFac, and its significant adoption (with active merchants on this solution increasing 40% and average merchant volumes improving 60% since the end of 2023), suggests a strong growth catalyst. This initiative is likely to positively impact revenue growth by expanding merchant adoption and usage.
  
• Expansion in the B2B sector, leveraging the PayFabric platform acquired with EVO, and seeing more than a 50% increase in new ISV partnerships leveraging PayFabric capabilities, indicates potential for substantial revenue growth from the increasing shift of B2B transactions to digital channels.
  
• Double-digit growth in software bookings in vertical markets such as education, real estate, and healthcare, including significant new partnerships, is indicative of an opportunity for continued revenue expansion in these high-potential sectors.
  
• High single-digit organic growth in Merchant Solutions, driven by integrated software and point-of-sale businesses, highlights a forward-looking growth catalyst, especially as market demand for embedded payments and commerce enablement solutions accelerates. This is expected to continue driving revenue growth.
  
• The strategic acquisitions made in Europe, aimed at improving strategic positioning and diversifying distribution capability, along with the recent launch of Commerz Globalpay in collaboration with Commerzbank, signal potential for increased market penetration in Europe. This could significantly impact future revenue and market share growth in the region.

Assumptions

• Analysts are assuming Global Payments's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.3% today to 18.1% in 3 years time.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $8.7) by about September 2027, up from $1.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.4 billion in earnings, and the most bearish expecting $1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2027 earnings, up from 19.5x today. This future PE is greater than the current PE for the US Diversified Financial industry at 15.6x.
• Analysts expect the number of shares outstanding to decline by 2.14% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Risks

• Market saturation and increasing competition in merchant solutions and integrated software solutions could lower Global Payments' market share, impacting revenue growth.
  
• The reliance on strategic acquisitions for growth, such as the acquisition of Takepayments, introduces integration risks and potential for inefficiencies that could affect net margins.
  
• Currency fluctuations pose a risk to reported adjusted net revenue, as adverse foreign exchange rates had a negative impact, which could continue affecting earnings.
  
• Regulatory changes and litigation in payment processing could introduce compliance costs or fines, especially in issuer solutions, potentially reducing net margins.
  
• Technological advancements by competitors in payment facilitation solutions and point-of-sale offerings could outpace Global Payments' innovation, impacting its competitive positioning and earnings.

Valuation

• The analysts have a consensus price target of $140.3 for Global Payments based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $204.0, and the most bearish reporting a price target of just $95.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $10.8 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 7.9%.
• Given the current share price of $107.95, the analyst's price target of $140.3 is 23.1% higher.
• 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.