Payment Data Systems: A High Risk/Reward Opportunity In The Mobile Payments Space

The investment case for Payment Data Systems Inc. (NASDAQ: PYDS) is pretty straightforward. The mobile payments industry has been seeing phenomenal growth, driven by increasing use of smartphones and tablets.  This substantial growth has attracted the attention of even conventional payment processing companies such as Visa Inc. (NYSE: V) and MasterCard Incorporated (NYSE: MA). Indeed, we have seen consolidation in the mobile payments industry in recent years and PYDS remains one of the few takeover targets left.

Mobile Payments Industry

The mobile payments industry has been growing at a robust pace. This growth has been mainly due to the increasing use of smartphones and tablets. Interestingly though less than 20% of Americans use mobile payments. According to a recent survey by Accenture, only 18% of Americans use mobile payments even though more than 50% are extremely aware of it. This means that there is room for further growth in the mobile payments industry. According to a report by eMarketer, the value of mobile payments transaction is expected to increase from $27 billion in 2016 to more than $200 billion by 2019. Not surprisingly, the industry has been attracting interest from major players.

Interest From Major Players

The mobile payments industry has been attracting interest from major technology companies and even payment processing giants Visa and MasterCard.

In 2014, Apple Inc. (NASDAQ: AAPL) announced the launch of its Apple Pay, offering an easy, secure and private way to pay using Touch ID on iPhone 6 and iPhone 6 Plus in stores and within apps. Last month, TechCrunch reported that Apple plans to expand the Apple Pay service across the world.

Search engine giant Google Inc. (NASDAQ: GOOG) offers Google Wallet, a peer-to-peer payments service that enables users to send and receive money from a mobile device or desktop computer.

Visa and MasterCard are also looking to capitalize on the mobile payments industry. Both companies’ interest in mobile payments industry is also due to the fact that mobile payments will eat into their revenues sooner or later. Indeed, mobile payments is a growth area for Visa and MasterCard. Recently, the South China Morning Post reported that Visa and MasterCard will be supporting the rollout of Apple Pay service in Hong Kong in the next few months.

The mobile payments industry has also seen consolidation in recent years. In 2015, Google acquired SoftCard. Samsung entered the mobile payment space with the acquisition LoopPay. These are just two of the multiple deals announced in the mobile payments space in the last three years. Interestingly, there are still some standalone companies that look like attractive takeover target. Payment Data Systems is one such company.

What Makes Payment Data Systems An Attractive Acquisition Target

Payment Data Systems is a profitable company, with no debt on its balance sheet. The company has seen robust growth over the last five years. In 2011, PYDS processed 4.3 million transactions. By 2015, the number of transactions processed by PYDS reached 14.3 million, growing at a CAGR of 35%. In dollar terms, the growth has been even more impressive. In 2011, PYDS processed $204 million in transactions. By 2015, the company processed $3.3 billion in transactions, growing at a CAGR of 101%.

PYDS’s partners and clients include some of the biggest names in Corporate America, including Wells Fargo and Pfizer. The company also serves more than 500 churches.

Recently, PYDS also announced that it has engaged Preston Todd Advisors to target and identify accretive acquisitions in the payments space as well as card processing portfolios.

Apart from these factors, PYDS is also an attractive takeover target because of its current valuation. PYDS currently has a market capitalization of just above $17 million. Nearly all of the major transactions in the mobile payments space in recent years have been valued at over $100 million.

A Risky Bet 

Given the interest in the mobile payments space and the fact that current valuation makes it an attractive takeover target, PYDS is an interesting opportunity. But PYDS shares have struggled over the past one year. In the last one year, the stock has lost more than 68% in its market capitalization. Indeed, while the potential for reward with PYDS is high, like all small cap stocks, it is also a risky bet.

One of the reasons why PYDS has struggled is because of the lack of awareness among institutional investors. Indeed, currently no institutions hold PYDS shares. This is one of the major reasons why the stock trades on very low volume. Having said that, PYDS has been taking steps to increase awareness among investors. The company has making presentations at various investor conferences, including most recently at the Sidoti Spring Convention. Another positive is high insider holding. Currently 62% of the shares are held by company insiders, which highlights their confidence in the company’s future.

Another reason why PYDS shares has struggled lately is because of a slowdown in its revenue. In the first quarter of 2016, PYDS’s revenue decreased 13.7% on a year-over-year basis to $3.2 million. The decline in revenue was mainly due to a decrease in volume of ACH processing transactions and return transactions processed, as well as customer attrition. The company’s gross margins were also squeezed in the first quarter. Despite the disappointing first-quarter results, PYDS continues to expect revenue growth for 2016.

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