Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Niklas Kammer. He is an equity analyst at Morningstar in Amsterdam. Hello.
Niklas Kammer: Hi, Holly.
Black: So, Niklas, one trend we've seen this year particularly is people not using cash for payments anymore. We're shopping online; we're tapping our plastic contact lists, and this means there's an opportunity. You're looking at merchant acquirer companies. What do they do?
Kammer: Yeah, a merchant acquirer company is a payment facilitator for a merchant. So, if we look at the payment value chain, they sit right between the merchant and a card network, typically a national debit or credit card, or you can think about international credit and debit card systems such as Visa and Mastercard. And what they really provide to the merchant is that they collect the payment, they connect to these networks, they process the payment and they also offer some risk tools which enable the merchant to make sure that the shopper that comes to the shop, it could be either into the store or online, that the shopper is actually who they claim they are to prevent any kind of fraudulent transaction occurring.
Black: Okay. So, that's what they do. How do they make money out of it?
Kammer: They make money in a very simple way is that they take a small fee, a small cut, out of every transaction that runs through their system. And what is important here to remember for these names is that they typically set up one system to process these payments and then the more merchants, they can link to their whole system and basically, more transaction volume that can run over that system, the more money they make, because there's very incremental spending and very low incremental costs that these merchant acquirers have to lay out for each new volume or each incremental volume that flows over their system, which obviously also goes both ways and goes in the opposite direction as we have seen in the past few months.
Black: Okay. So, is this a growing space? What are the main drivers for these companies?
Kammer: Yes, this is a growing space and it's depending on which vertical you are in, or whether we're talking of in-store transactions being processed or ecommerce. There's a slight difference in the growth profile. But overall, it's a very strong growing business. So, if we think about the growth drivers behind the in-store payment processing, you have to think about the spending power of shoppers, how much do they go to the stores and spend and then how do they choose to spend. Do they choose to pay with traditional or in the form of cash or do they pull out their credit card or debit cards, or maybe an E-wallet to pay for these transactions? In the ecommerce space, you have the general growth of the ecommerce market and then also shoppers diverting from in-store purchases to ecommerce purchases.
Black: Okay. So, what stocks are you watching in this sector?
Kammer: We're covering two merchant acquirers – Nexi and Adyen. And although both names are both merchant acquirers, they tackle different markets entirely in our view. So, if we think about Adyen, Adyen is a global merchant acquirer that primarily focuses on the ecommerce market and drives the biggest value – the biggest value proposition is to very large merchants which operate on a global basis. A good example is, for example, a company like Spotify that needs to process payments from subscribers all over the world.
Nexi, on the other hand, is an Italian pureplay. So, they operate primarily solely in Italy, and there the market is a more in-store driven payment space where it's very cash heavy and for them the growth driver is more the shift from cash transactions over to card transactions which drives the growth for them.
Black: Okay. So, under Morningstar analysis these companies do have economic moats. That means they've got barriers to competition. But what do their share price valuations look like?
Kammer: Yeah. At the moment, we think that the valuations are a bit lofty, especially for Adyen. So, Adyen trades in 2-Star territory. We do really like the company. There's not much to hate about their business model, their growth prospects or their management. But the valuation is just difficult to get to. Nexi, on the other hand, is getting very close to our fair value estimates. The company also has a very good growth outlook and we think their shares are becoming more and more interesting as they approach our fair value estimate.
Black: Niklas, thank you so much for your time. For Morningstar, I'm Holly Black.
