Acquisitions could catalyze Global Payments Inc.'s (GPN, Financial) stock price. The recent purchase of SICOM may provide cross-selling opportunities as well as synergies with the company’s existing offering. Alongside previous acquisitions in the last year, it may help to further the company’s vertical integration strategy, which could provide greater customer loyalty and a wider economic moat.
Investments are also being made in its omnichannel and e-commerce offerings. Partnerships and a focus on smaller businesses could also enhance its performance.
Although it faces risks from rising competition, expansion into fast-growing markets and a broad footprint could provide it with a competitive advantage versus peers.
Having gained 11% in the last year versus a rise of 8% for the S&P 500, the stock could have investment potential.
Acquisitions
The recent acquisition of SICOM Systems could catalyze the company’s financial performance. It is a cloud-based software-as-a-service platform for food service management companies and quick-service restaurants, with its total addressable market being around $6.5 billion. It offers synergies with the company’s existing restaurant platform, Xenial. SICOM adds middle-of-house and back-of-house software and other technology capacity to Xenial’s front-of-house platform. The combination will provide a range of services to customers, including payroll scheduling and procurement capabilities. Given that the Xenial platform is already used in 25,000 restaurants, it provides cross-selling opportunities for SICOM’s platform.
Other recent acquisitions could also boost Global Payments’ financial prospects through the potential for increasing vertical integration. The acquisitions of ACTIVE Network and AdvancedMD provide the company with access to SaaS platforms in fragmented industries where cross-selling opportunities are high. This could lead to a larger portion of repeat revenue and stickier sales since customers are less likely to leave if they use a suite of the company’s products. Vertical integration may also provide greater cross-selling opportunities as well as a broader net through which potential customers can be acquired.
Strategy
The company’s e-commerce and omnichannel business could deliver further growth due to its focus on small to medium-sized customers. This provides it with a more distinctive product versus peers, while its ability to offer solutions for cross-border acceptance in hard-to-serve markets such as Taiwan and Malaysia means it has a competitive advantage. It has also put a number of partnerships in place with institutions like HSBC (HSBC, Financial) and Erste Bank, which allows it to access faster-growing markets.
The investments being made in new technology are helping to increase the company's economic moat. Global Payments is set to further differentiate its omnichannel offerings through enhancements to its platform, as well as through developing its cloud-based SaaS modular systems that are already in production. With a localized presence in nearly 60 countries, the company offers higher acceptance rates and lower fees for more complex and demanding customers.
Risks
One risk facing the company is increasing competition from rivals such as Square Inc. (SQ, Financial). The rival IT service management company recently announced it will launch its own point-of-sale solution which caters specifically to the restaurant industry. The company, as well as others in the payments sector, also has the capacity to extend its products and services into other industries. It could also follow a similar business model to Global Payments that focuses on vertical integration and cross-selling.
Global Payments, though, has a larger international footprint than many of its peers. It has operational and support resources with local and multinational expertise in 31 countries. Therefore, it has relatively broad exposure and greater diversity while it is seeking to expand into a number of fast-growing markets. For example, it plans to enter Mexico in the near term while extending its partnership with HSBC. It also has exposure to fast-growing markets such as Spain, Singapore and the Philippines, where double-digit organic revenue growth was recorded in the most recent quarter.
Outlook
Acquisitions could provide Global Payments with cross-selling opportunities, synergies and the potential for further vertical integration. This could strengthen its position versus peers, while additional investment in its platforms may enhance customer loyalty. A differentiated omnichannel and e-commerce product may offer a competitive advantage versus competitors.
While competition is likely to rise in its key markets and segments, diverse geographical exposure and expansion into fast-growing markets could offer a wider economic moat. Having modestly outperformed the S&P 500 in the last year, Global Payments may have investment appeal.
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