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Why this tech stock is primed to own the 21st century

Worldpay. Fair use.

In the fast moving world of technology it can be mind-bogglingly difficult to ascertain which company will be a long-term winner and which will fall out favour in a few years. Will Apple be able to come up with a new product as popular as the iPhone? Can Facebook continue it’s dominance of social media?

But there is one tech segment that is growing quickly, has room for several major players and, most importantly, thus far has no huge competitor on the horizon. And that is the fast growing world of payment processors. I believe Worldpay Group (LSE: WPG) has the staying power to remain a force throughout this century.

I bet RBS wishes it had kept this company

The firm is expanding rapidly by serving businesses of all sizes to process card payments online and offline. This strategy is paying off, as we saw in 2016 when a sterling history of double-digit growth persisted as it notched up a 12% year-on-year rise in transaction value to £451bn and a 15% rise in revenue to £1.1bn. There’s little reason to expect this growth to slow as more consumers turn away from cash and use cards instead.

Furthermore, as the company matures it is seeing lower capital expenditure needs and benefitting hugely from economies of scale, which is dramatically improving margins and cash flow. In 2016 free cash flow rose from £32.4m to £170.9m.

For now, considerable cash from operations is still being directed to paying down debt related to its former private equity owners. It moved in 2016 from £1.4bn in net debt to £1.3bn. But as this debt load shrinks, Worldpay is going to be in a great position to pay shareholders very large dividends.

The 21st century will be dominated by non-traditional methods of payment and Worldpay Group is well placed to benefit from this trend thanks to a huge first mover advantage, global scale and well-run operations. With the company’s shares trading at just 22 times forward earnings, I believe investors with a long time horizon may find now a great time to act.

One to bet on?

For the more risk-hungry investor, another option in the same industry is Paysafe (LSE: PAYS), which focuses on serving the global gambling industry. The group ran into trouble last year when a short selling outfit issued a scathing analysis of the risks involved in the Chinese gambling market. But the company’s shares have since rebounded strongly.

And in response to the short seller, the company has reviewed its operations, improved corporate governance standards and expanded into the much safer US market through acquisitions.

These efforts are improving the bottom line as well. In 2016 total revenue rose 63% year-on-year to £1bn, organic sales grew 21% and adjusted EBITDA nearly doubled to £300m. All the while net debt was brought down to £279m thanks to impressive cash generation.

Although the company has done well to diversify away from simply processing payments for online gambling, this segment still accounts for a full 46% of sales and is always subject to possible regulatory action. Paysafe seems to have turned a new leaf and is growing strongly. This, combined with a low 11.7 forward PE ratio may tempt many investors. But with a history of disappointing shareholders the company remains a much riskier option than Worldpay.

Worldpay has a great history of growth but it still can't match the record of the Motley Fool's Head of Investing's Top Growth Share of 2017, which has grown sales every single year since going public in 1997. And with international expansion just beginning, the Fool's top analyst sees the potential for the company to triple in size in the coming decade.

To discover this share that has already returned over 250% in just the past five years, simply follow this link for your free, no obligation copy of the report.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple and Facebook. The Motley Fool UK has recommended Worldpay. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.