It is estimated that by 2019, the value of mobile-based payments will surpass $142bn in volume in the US alone, up from around $50bn currently.
What’s more, even though the size of the US mobile-based payment industry is set to nearly triple over the next four years, at the peak mobile payments will only total around 1% of the $16trn US consumer payments market.
Over the past five years, Monitise has shown to me time and again that it cannot be trusted. When it warned alongside its full-year 2015 annual results that it was going to miss forecasts once again next year, and the company’s experienced CEO Elizabeth Buse was leaving after only a few months on the job, I lost confidence in the company.
Moreover, City analysts believe that Monitise will continue to report hefty statutory losses for the foreseeable future. Current forecasts suggest the company will report an operating loss of £61m for 2016, £54m for 2017 and £54m for 2018.
Compared to Monitise, Paypoint looks to be a relatively safe bet. The company has grown steadily over the past five years. Revenue has expanded at a rate of 2.1% per annum since 2010, and margin improvements have helped push net profit higher by 12.1% per annum over the same period. Earnings per share have expanded at a rate of 11.9% per annum since 2010.
And Paypoint’s steady earnings growth has translated into impressive returns for investors over the years. Since October 2010, Paypoint’s shares have returned 226% excluding dividends, outperforming the FTSE 250 by 169%. Paypoint currently supports a yield of 4.5%. Including dividends, the company’s shares have returned 30.8% per annum since 2010.
Unfortunately, Paypoint’s steady growth and lucrative returns don’t come cheap. The company’s shares currently trade at a forward P/E of 15.9, but if you factor in the group’s cash position of £40m and return on equity of 35.7%, it’s easy to see that Paypoint’s shares deserve their premium valuation.
The same can’t be said for Optimal. Granted, the company’s growth has been explosive over the past few years. Revenue has increased at a compound annual growth rate of 42.5% since 2009, net profit has exploded over 4,700% since 2012, and shareholder equity has risen five-fold since 2011. However, Optimal’s return on equity is a lowly 6.2%, and the company doesn’t pay a dividend.
Then there’s the different nature of Optimal and Paypoint’s business to consider.
Specifically, Paypoint is the UK’s leading payment collection network used mostly for the cash payment of bills and services. The company bridges the gap between cash and non-cash payments, which means that Paypoint is uniquely positioned in the market. Optimal, on the other hand, is focused on the extremely competitive online payments space.
With new competitors like Apple Pay springing up almost every day, it’s difficult to assess how long Optimal can continue on its current growth trajectory. And with that in mind, Optimal’s premium valuation of 15.4 times forward earnings looks rich.
The bottom line
So overall, if you’re looking to profit from the growth of the mobile payments market, Paypoint looks to me to be the best choice.
Investing in high-quality, cash-rich companies with a wide moat like Paypoint is the key to long-term wealth creation. It's also the investment strategy favoured by billionaire Warren Buffett.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise and PayPoint. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.