Stocks in financial technology (fintech) have been hot in recent years. And the explosion of e-commerce in 2020 has put companies that facilitate digital transactions firmly in the spotlight.
Within the innovation space of financial technology, investors initially think of US heavyweights such as PayPal (NASDAQ :), Square (NYSE :), Visa ] (NYSE :), Mastercard (NYSE 🙂 and Fiserv (NASDAQ :). Recent entrants such as Bill Com (NYSE 🙂 are also gaining significant market attention.
However, the trend towards cash and contactless payments is not limited to the US, as the volume of online shopping and digital payments and the number of fintech-related businesses is increasing worldwide. Potentially fast-growing technology companies looking to capitalize on the wave of digitization are expanding into new markets around the world.
Today we are introducing the UK-based small-cap stocks PayPoint (LON :). It is a member of the Index, which currently has 631 members.
Evolving Operations
PayPoint's operations date back to 1996. UK residents or visitors have noticed the company's yellow logo or may have used the services from local convenience stores or supermarkets such as Tesco (LON 🙂 (OTC 🙂 and Sainsbury (LON 🙂 (OTC :).
Initially, PayPoint's focus was more on cash payments, money transfers, providing ATMs in convenience stores, and paying bills (primarily for utility companies).
In recent years, however, the company's operations have evolved to offer omni-channel payment solutions. It has also worked to capitalize on the growth of e-commerce and the associated increase in parcel delivery.
The payment terminals are located in more than 40,000 small retailers. The focus on independent retail now means that in the UK
"99.5% of the urban population lives within a mile of a PayPoint partner and 98.3% of the rural population lives within a five mile radius."
Services include card payments, Electronic Point of Sale (EPoS), phone SIM card top-ups, cash bill payments for individual customers, as well as inventory management and sales reporting for businesses.
Transformation of Paypoint's Business Model
The group also owns the Collect + parcel drop-off service, available at approximately 10,000 locations in the UK. In 2020, Collect + handled nearly 25 million parcels in a country of more than 67 million inhabitants.
In 2020, the company also partnered with numerous local authorities on various government programs, such as school meal vouchers and COVID-19 related credits.
Recent Performance of PayPoint
PayPoint stock traded in April 2003 at 200p. In January 2020 they totaled over 1,000 pence.
Still, 2020 proved to be a challenging year for the stock as it fell about 35% over the past 52 weeks and the current stock price stands at 655p. Passive income seekers may be interested to know that the dividend yield is over 5%.
In recent months, PayPoint has come under regulatory scrutiny through the Office of Gas and Electricity Markets (Ofgem) in the UK.
Ofgem highlights:
"PayPoint had a dominant position in the market for over-the-counter payment services to prepaid energy customers for at least the period from April 2009 to October 2018."
Ofgem's allegation that the company has violated competition laws has put pressure on PayPoint's stock.
On January 21, PayPoint released a quarterly trade for the period ending December 31. The company's recent results show a shift, with increasing revenues from online services and packet transactions and lower revenues from ATM transactions and bill payments.
In the trade update, management emphasized:
“PayPoint is well positioned to take advantage of the ongoing shift from cash to digital payments, the growing demand for online shopping and the increase in local shopping…. Strong card payment volumes [were] were maintained and grew significantly at 46.2% year over year to 49.7 million transactions. UK package deals were up 6.6% and delivered resilient performance despite COVID-19 restrictions. "
Bottom Line
Digitization trends are likely to benefit from increased tailwinds in the coming quarters. Therefore, PAYP shares may be attractive to investors interested in exposure to this trend in the UK.
Compared to US-based competitors, the company has not offered a very high price appreciation. However, it does provide a consistent dividend that may interest some investors.
The expected price-earnings and earnings ratio of the PAYP stock are 13.51 and 2.17 respectively. Any possible price drop of 5% -7% would improve the margin of safety. Meanwhile, given its reach to both small retailers and consumers, the group could potentially become an acquisition target.
Those investors who are unwilling to spend capital on PayPoint, but are interested in the industry, might consider an exchange-traded fund (ETF) instead. Examples include ARK Fintech Innovation ETF (NYSE :), the Global X FinTech ETF (NASDAQ :), and the Ecofin Digital Payments Infrastructure Fund (NYSE: ). In the past year, these three funds have increased by 115.4%, 45.5% and 30.1% respectively.
Some of the names held by these funds are Adyen (OTC :), Afterpay (OTC :), Discover Financial Services (NYSE :), Fiserv, Bill.com, Mastercard, PayPal, Square, Tencent Holdings (OTC :), Visa, and Worldline (PA :).
