Global Payments Seems Better Than The Valuation Suggests (NYSE:GPN)

choochart choochaikupt/iStock via Getty Images Global Payments (NYSE:GPN) was quite the growth stock back in the day, sporting multiples of EBITDA over 20% on the back 20%-plus EBITDA growth, and if you owned the shares through the 2010s, you made quite a bit of money. As is often the case with high-multiple growth stocks, though, when the music stops (in this case the robust revenue and EBITDA growth), the multiples collapse, and the shares are down more than 50% from the last time I wrote about them. Sometimes “broken” growth stocks can come back, and it’s worth asking if that’s the case for Global Payments. Double-digit EBITDA growth seems out of reach now, at least on a multiyear basis, but mid-single-digit growth can still support a fair value in the neighborhood of $130, suggesting meaningful upside. FinTech Competition Seems To Have Eased And Global Payments Isn’t Helpless I think quite a bit of the pressure on Global Payments over the last few years, both in terms of revenue/EBITDA growth and sentiment, has been the entry of new tech-driven players in the payments space. There was a surge of VC funding early in the decade (over $120B in 2021) for fintech, and that greatly expanded the options available for the smaller businesses that Global Payments has traditionally targeted (and that larger players like JPMorgan (JPM) and Fiserv (FI) haven’t really targeted seriously). With that, Global Payments saw meaningful pressure on volume growth, and that metric has slowed from consistent double-digit growth to mid-to-high single-digit growth. While the company has recently been outperforming the volumes reported by Mastercard (MA) and Visa (V), proxies for addressable volumes, that hasn’t been a consistent trend. The bull case here rests on the idea that the pressure from new incumbents has stabilized, if not declined, and that Global Payments has tech-based tools of its own to reassert itself and maintain solid volumes in its primary Merchant Solutions business. Venture capital funding for new fintech has plunged over the last two years, with 2023 funding only about 30% of 2021’s level. While there are still arguments for newer entrants like ease of use, onboarding, and authorizations, Global Payments has countered with strong tech-enabled offerings (almost two-thirds of Merchant revenue is tech-enabled, and 75% of new sales in the U.S. in 2024). These offerings include e-commerce systems/platforms and integrated offerings that couple business-relevant software with the payment platform (like software that can manage ordering, inventory, and customer loyalty rewards for restaurants). I believe this is an underappreciated asset for Global Payments that has taken years to assemble through M&A and partnerships; while other fintechs could build similar software stacks, it would take a lot of time and I think there are meaningful switching costs here to consider – if you’re a restaurant, dentist office, or small merchant that uses GPN’s software stock, switching providers means changing a great deal more than just who provides the card swiper. Opportunities With Issuers Are B2B Are Worthwhile, But Won’t Develop Overnight Merchant Solutions will continue to drive the story, but I think there are underrated drivers elsewhere in the business that could add profitable revenue growth over the years. Global Payments’ Issuer Solutions handles the processing needs for card issuers (banks and retailers), and while there has been competition here too from newcomers like Marqeta (MQ), Adyen (OTCPK:ADYEY), and Stripe (STRIP), they’ve generally been more of a threat on the debit side versus credit. The growth potential I see here is tied to the fact that most banks are eager to grow non-spread-based sources of income, and the fees that come with card businesses are quite attractive. Banks, particularly regional banks, are not going to in-house the processing and similar “back office” functions, and that gives GPN an opportunity to benefit from more banks looking to enter the card space. I also see longer-term growth potential in B2B, but “potential” is really the watchword here. A surprisingly large amount of B2B payments is still done through physical checks or wire transfers, and there are opportunities here for card-based payments and real-time payments that Global Payments can address. Visa has sized B2B cards as a roughly $40B opportunity that is still significantly underpenetrated, and GPN already has a presence here (commercial card transactions have been growing nicely for the company). I’d also note that there’s an opportunity here in managing/processing B2B accounts receivables/payables, facilitated by the $4 billion acquisition of EVO back in 2022. Receivables and payables have been estimated to be almost 70% of the $125T addressable market in B2B payments, though Visa has stated it’s a disproportionately smaller piece of the addressable revenue opportunity (likely due to lower revenue per transaction potential). Even if the revenue opportunity is “only” a few billion dollars for Global Payments, it’s still worth pursuing. The Outlook To be sure, there are ample risks to GPN’s outlook. Established players like JPMorgan, Fiserv, and U.S. Bancorp (USB) are still looking to grow their merchant businesses, and relative newcomers like Toast (TOST), Shift4 (FOUR), Stripe, and Shopify (SHOP) are not giving up on their own growth goals. I also see a risk that there may just not be that much additional upside for margins in the Merchant Solutions business – overall margins are already in the mid-40%’s and the ceiling may be closer than investors would like. Then there is also basic macroeconomic risk – the current outlook for the economy is cloudy at best, and weaker consumer spending would certainly hurt near-term results. Given opportunities to gain share in payment processing through expanded tech offerings, not to mention opportunities to benefit from card growth outside the U.S., as well as longer-term opportunities to benefit from increased bank card issuance and B2B payments, I think GPN can generate around 6% long-term revenue growth. On the margin side, like I said, I do have concerns that GPN will hit a ceiling and/or that newcomers will accept lower margins to support growth. On the positive side, though, management is looking to exit subscale businesses around the world where there is no clear path to attractive scale, as well as streamline internal operations. I’m looking for around one and a half points of adjusted operating margin improvement over the next three years (from 44.6% in FY’23 to 46% in FY’26) and around 50bp of EBITDA margin leverage (to 50.5%). On free cash flow, I’m looking for GPN to improve from the low-20%’s to the mid-20%’s over time, with the company leveraging scale to drive more FCF generation. That would support around 10% FCF growth. I’d expect management to continue to pay down debt and given that it has been a while since they’ve done a large deal, more M&A could be on the way, but I think there’s also growing pressure on management to increase the payout to shareholders. Between discounted free cash flow and margin/return-driven EV/EBITDA, I believe fair value is around $130 (with a 10.25x forward EBITDA multiple). The Bottom Line Competition has been a significant challenge in the payments space, but I believe Global Payments has withstood the worst of it. If the company can maintain mid-to-high single-digit volume growth in its core business, aided by its software and tech offerings, and drive some growth from increased bank card activity and B2B activity, I think the shares can offer enough upside to be worth a closer look.

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