Spotting the winners in mobile payments

5th Apr 2013 16:01

Forty years ago this week, the first call was made on a mobile phone. With talk-time limited to just 35 minutes in those days and no screens to speak of, shopping and banking on your phone was definitely not on the cards - even slipping those mighty 'brick' handsets into your pockets was pretty much impossible. Skip to the present day and on-line shopping is a growing phenomenon on which Amazon and others have built giant businesses. This spending is increasingly being conducted on handheld devices, with some £7.5bn spent via mobile phones in 2012, according to IMRG Capgemini. Mobile device sales therefore accounted for 12% of the £62.4bn spent at e-retail sites last year - a threefold leap compared to the comparable figure from just one year before that of a 4%.When looking to tap into this market, there's so much new technology that investors and mobile market watchers find it challenging to work out which direction technology is broadly shifting towards and which emerging products are going to be the big new thing. One way to read the runes about smaller tech stocks is to see whose products and services are exciting the interest of existing leading technology owners. From this perspective, there was no question Bango was sitting on some hot technology when Amazon and Blackberry signed up as a clients in the last couple of years. But when Google, Facebook and Microsoft then jumped on board, things started seriously sizzling. This is why shares in the Cambridge-headquartered company have soared from near 50p to over 250p since the start of 2012. Bango is one of the leading providers of operator billing technology, which allows mobile users to add the cost of an app or other small mobile purchase to their monthly phone bill. Companies and mobile networks appreciate the tech as end-users are less likely to be put off from making purchases this way, compared to fishing out their credit card and thumbing in the long number or storing their details with an unknown third party. Although some network operator customers such as Telefonica offer carrier billing via their own payment systems, Bango has already forged the deals with multiple app store providers and so is a crucial intermediary. Mobile networks cannot forge these deals with Facebook, Amazon and the like as customer details are sensitive and mobile operators are wary of the web goliaths moving in to their space. Also, it's much quicker and easier for both content providers like Facebook and the operators like Telefonica to plug in to Bango which is connected on both sides of the equation, having deals with both sides itself. The direct operator billing market is estimated to climb to $13bn in 2017 from $2bn in 2012.After experimenting with a number of other applications for its technology the company recently moved its focus from mid-range 'feature phones' to the increasingly popular smartphones such as iPhones, Samsung's Galaxy range and the new Blackberry 10 range. This has seen Bango become established as mobile carrier billing partner of choice in the global app store market, starting with Blackberry and recently building with several other major clients, with Facebook and Google having begun to cautiously roll out the technology. Bango has provided the service for BlackBerry's legacy products for the last year or so, but as the much-hyped new BlackBerry 10 phones roll-out around the world, both companies are set to benefit. An indication of the shift from feature phones and the growth of Bango's new smartphone app store business is the fact that app revenues grew from 60% in December 2011 to 77% of end-user spend by December in 2012. This is mostly from Blackberry, although others including Facebook, Google and Opera have started to contribute towards the end of its 9-month financial period. These are big companies and they don't experiment with technology willy nilly, so roll-outs are progressing bit-by-bit. Thus far Facebook has only just rolled out in four countries so far and Blackberry 10 only in Canada and UK until recently. There are other customers who are also still in the process of launching, such as Amazon, which is being exceptionally cautious. With a fairly stable cost base, Bango looks highly operationally geared and once revenue swells it should leap into profits. Boosted by the rocket fuel of these big-name client wins, the shares have surged to a sky-high price-to earnings ratio well over 60. However, the air was too thin without the oxygen of continued news-flow and the shares have fallen by around a quarter from their 288p in the weeks since the company's fairly humdrum financial results. But cushioned by a healthy cash position, broker Cenkos expects 2013 to deliver "steady progress and a move towards profitability", and any encouraging news announcements should inject life back into the stock.Optimal looking to ride US gambling rollercoaster, againA not-too distantly related cousin in the on-line payments world, Optimal Payments (OP) sits on a more comfortable forward p/e of around 18 times current full year earnings. OPAY has been developing new innovative product developments in mobile and has already crawled its way into the promised land of profitability after a few years in the wilderness. Formerly called Neteller and then Neovia Financial, Optimal cannot deny its chequered past. But its roller-coaster ride looks to be swinging back upwards as it hopes to re-enter the US on-line gambling market. US online gambling was a market that once made its Neteller business over $100m of net profit in 2006 before the government clamped down. But now things are looking rosier, with analyst Ivor Jones at Numis seeing "bold stripes and bright stars on Optimal's horizon" as the company partners with Caesars Interactive, which it sees as "one of the leaders in US on-line gambling".In February, New Jersey signed a law legalising on-line betting, only a week after Nevada had created similar legislation for poker. The state of Delaware is expected to be taking bets by the autumn and other US states are said to be considering copycat regulatory moves. OPAY is a provider of technology that enables safe payment and money transfer services, giving merchants and consumers an alternative to banks and card schemes when moving their money online. It has recently expended much focus on delivering a next-generation mobile-enabled e-wallet for the traditional retail marketplace, enabling merchants to offer what it calls "a comprehensive omni-channel solution that bridges the offline and online worlds". In April it was named as the winner of the "Best Mobile Billing Application" at the mGaming Awards so seems to have an above average product, as partnerships with Caesars and Vantiv also indicate. Numis estimates OPAY will deliver $22.9m pre-tax profits and $0.13 EPS for the full year 2013, rising to $29.5m and $0.17 in 2014. The broker believes its base case forecasts justify a 210p price target, but sees potential for much more: "Optimal could have further white-label relationships with major banks and acquirer membership of the main card schemes. Each of these have the potential to add materially to our already attractive base case forecasts."OP shares hit a six year peak, breaking the 180p mark for the first time since the Neteller glory days. After taking a breather for a while they should regain momentum again before long. A p/e of under 20 is not too demanding for a small company with big potential, especially as it is already in the black and has experience in online gambling market.Monitise mobile gainsAnother company in this space is Monitise. Although it has not reached profitability I feel in some ways it is less speculative than OPAY. This is because its technology has a big fan in card payments behemoth Visa's European arm, which tells you plenty about the quality and potential. The pair, which have been working together since 2011, recently signed heads of terms for a new three-year contract, covering licence rights to all aspects of Monitise's mobile technology. This technology basically provides the infrastructure to help banks and card networks advance their competitive position in mobile payments, and the new deal also includes further development and deployment between the two companies as well as representing minimum revenues to Monitise of 45m euros.Losses at its recent half-year results put a small dampener on some exciting figures within, with transactions on an annualised basis climbing from £480m to £2bn over the previous 12 months, in which same time the number of registered customers grew from 6m to 20m (out of a worldwide total of 350m mobile banking users). Seriously impressive figures. Looking at the chart, and its shares have peaked over 35p and come close to reaching 40p but not yet topped that mark. Losses are expected for the current and next year, but the feeling is that the next two years will see the breakthrough. Of the three companies Bango is the smallest at £94m market cap, Optimal Payments around double at £211m and Monitise the largest at £502m. Rather than bet on a winner, an online payments mini-portfolio would give you great each-way odds. As all three operate in different areas of the market, we could have three winners on our hands. But if pushed to pick one... aww, well shucks, I'm a sucker for a speculative tiddler so I'd plump for Bango.