Forget Amazon: Look to Europe for a Better E-Commerce Play
Wall Street darling Amazon (NSDQ: AMZN) gets plenty of fawning attention on CNBC, even though CEO Jeff Bezos’ aggressive expansion strategy hasn’t done much to lift the online merchant’s profit margin. The financial press loves to worship corporate CEOs like Bezos, holding them up as demi-gods. Perhaps it’s for the perverse joy of tearing them down later.
That’s why every day, I scrutinize the relatively obscure news items and read between the lines. It’s a great way to find hidden investment gems. This week, a rarely mentioned payments processor caught my attention as a harbinger of big profits to come in overseas e-commerce. The firm is Vantiv (NYSE: VNTV), an Ohio-based payment processing and technology provider that’s the largest U.S.-based merchant acquirer ranked by general purpose transaction volume.
Vantiv announced Wednesday that it intends to buy London-based Worldpay (OTC: WDDYF) for $9.9 billion. Analysts aren’t making the connection, but this move underscores the investment appeal of European e-commerce in general and German-based Wirecard AG (OTC: WRCDF) in particular. Wirecard is the largest credit card company on the Continent. I’ll get to Wirecard in a minute.
First, for context, let’s examine Vantiv’s bold move and what it portends for e-commerce.
With a market cap of $12.5 billion, Vantiv gets about half of its annual revenue from large retail chains, which have come under siege by Amazon and the e-commerce revolution. Worldpay provides payment services for large, small and mid-sized businesses, including payments online, card machines and telephone payments.
Vantiv’s move to gobble up Worldpay comes amid a wave of consolidation in the payment processing business. The threat from e-commerce to “Big Box” brick-and-mortar stores has prompted payment processors to seek operational efficiencies and new sources of revenue. Worldpay processes 31 million mobile, online and in-store transactions every day. The Vantiv/Worldpay deal is likely to trigger a frenzy of M&A activity in the industry.
Vantiv’s goal in buying Worldpay is to diversify its client roster into smaller companies, achieve economies of scale, and tap expanding overseas markets — especially Europe, which is undergoing an economic renaissance. Worldpay serves 400,000 customers and processes payments in 146 countries and 126 currencies.
The U.K. is Worldpay’s largest market, where it boasts a staggering 40% market share of businesses large and small. The U.K. and Germany are the number one and two European e-commerce markets, respectively.
JPMorgan Chase (NYSE: JPM) had been invited to make an offer for Worldpay but announced on Wednesday that it would pass. Vantiv processes customer transactions for Whole Foods Market (NSDQ: WFM), which Amazon recently proposed buying for $13.7 billion. Amazon uses JPMorgan for payments processing. JPMorgan Chase probably isn’t done scouting for acquisition targets similar to Worldpay, as the money center bank looks to expand its e-commerce presence.
Powerful tailwinds overseas…
Europe is a compelling source of investment growth, especially as U.S.-based equities appear overvalued and poised for correction.
Which brings me back to Wirecard, Europe’s counterpart to Visa (NYSE: V) and Mastercard (NYSE: MA). Year to date, Wirecard shares have soared more than 61% but the run-up should continue as European tailwinds accelerate.
I most recently wrote about Wirecard in my June 14 issue. This financial services stock is a superb way to gain exposure to the e-commerce boom in Europe, particularly in the U.K. and Germany, two major markets for Wirecard.
Wirecard provides information technology solutions for electronic payment transactions worldwide. The company does business via three divisions: Payment Processing & Risk Management, Acquiring & Issuing, and Call Center & Communication Services.
Wirecard’s vertically integrated payment processing solutions include Wirecard Checkout Page, a payment page; credit card processing; direct debit; online banking payment; international payment processing; and point of sale terminals. Wirecard provides several international banks with easy-to-integrate online payment systems for e-commerce. Wirecard already enjoys an entrenched position in the affluent and fast-growing European markets that Vantiv now eagerly pursues.
Igor Greenwald, chief investment strategist of Income Millionaire, makes a compelling argument for gaining exposure to Europe:
“Confidence across the Atlantic has soared; hiring and growth are also on the rise…
Last year outflows from European stocks totaled a heavy $100 billion or so — ahead of the Continent’s biggest economic boom in decades.
How big? Well, the famously phlegmatic German managers have just pushed their country’s business confidence index to a 26-year high. Consumer confidence across the Eurozone is at a 16-year high. A German index of help-wanted listings is at a record, while in France job openings are up 14% year-over-year.
This economic revival has just powered the best European earnings season in years, and stemmed the fund outflows, though so far only a trickle of that money has returned.
And the best thing about all of this good news is that’s it’s not at all priced into European stocks, which are not only fundamentally more attractive than U.S. and global equities but also much better placed to ride the economic pickup on their home turf.”
Bezos’ behemoth: Big ambitions, tiny margins…
For all these reasons, I think Wirecard is one of the most compelling (and underappreciated) e-commerce plays you can find — certainly more compelling than overpriced Amazon.
Jim Pearce, chief investment strategist of Personal Finance and director of portfolio strategy for Investing Daily, throws some shade of Amazon:
“Amazon enjoys a mythic status on Wall Street due to the way it has systematically disrupted the entire retail industry.
After dismantling the book industry, it quickly did the same for sellers of records and tapes (remember those?), and it soon moved on to just about every form of merchandise that is capable of being digitized and purchased online or delivered to your door inexpensively.
Amazon’s growth has been breathtaking; over the past ten years its revenue has increased more than seven-fold, accompanied by a 400% improvement in net income. But therein lays the potential problem with its business model, to wit: the company’s profit margin is a measly 1.8%.”
With a market cap of $8 billion, Wirecard is a mid-cap with greater room to soar than its mega-cap peers. The stock’s trailing 12-month price-to-earnings ratio (P/E) is a bargain at 27, considerably lower than major U.S.-based competitors such as Visa at 46.9, Mastercard at 31.8, and PayPal (NSDQ: PYPL) at 45.2.
If you’re wary of nosebleed valuations in the U.S., consider bargain-priced growth proposition Wirecard. The splashy Vantiv/Worldpay deal this week serves to strongly validate the German company’s value, especially when you consider that JPMorgan Chase is throwing its hefty weight into European e-commerce. In successive issues of my newsletter, I’ll recommend other plays on Europe’s resurgence.
Got any questions or comments? Drop me a line: firstname.lastname@example.org. I reserve the right to edit reader letters for the sake of concision and/or clarity (as well as civility). — John Persinos
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