From Barron's:
Apple Pay further locks in the position of Visa and MasterCard, the world’s top payment networks.
For years, technology companies have set their sights on the payment industry, with each firm wanting a slice of the digital wallet. So Apple ’s plan to partner with the industry’s most established names— Visa (ticker: V), MasterCard, (MA) and American Express (AXP)—came as a surprise when it emerged last month. Apple Pay, officially launched last week, is essentially a high-tech way to access traditional cards issued by big banks. For Visa and MasterCard, it’s just one more conduit to their dominant electronic networks.Despite the efforts of eBay (EBAY) and Google (GOOGL) and start-ups like Square, Silicon Valley couldn’t blow up the traditional ecosystem.“Early adopters in the [digital] space have learned the hard way,” says Jim McCarthy, Visa’s head of innovation and strategic partnerships. “Payments are just hard.”Apple’s embrace should give long-term investors confidence about Visa and MasterCard’s highly profitable networks. The companies themselves are clearly proud about bringing Apple (AAPL) into the fold: “We feel that it’s a huge validation of our strategy and of the tech choices that we’ve made,” says James Anderson, MasterCard’s senior vice president for mobile and emerging payments.Apple Pay could spawn other winners, as well, including VeriFone Systems (PAY), which makes payment terminals; NXP Semiconductors (NXPI), which makes the chips powering the Apple technology; and Synaptics (SYNA), a maker of fingerprint sensors for mobile phones.Shares of MasterCard and Visa aren’t cheap, but the stocks have always traded at a premium to the broad market. Even at 21 times earnings for the next 12 months, MasterCard looks reasonable, especially with earnings set to grow 19% in each of the next two years. MasterCard shares could gain 15% next year given earnings growth—even if the multiple falls slightly. Visa fetches a similar multiple with slightly lower growth prospects. The stocks generally trade in tandem.The networks say that Apple Pay does nothing to change the economics of their business. But any technology that pushes consumers to abandon cash is a long-term positive for Visa and MasterCard. Barron’s outlined the enduring opportunity in a cover story two years ago (“The End of Cash?” Dec. 31, 2012). This year, MasterCard’s revenue is forecast to grow 13%, to $9.4 billion, with Visa revenue probably up 8%, to $12.7 billion.Apple hasn’t disclosed details, but The Wall Street Journal reported that Apple will receive a fee from banks for every Apple Pay transaction. Even so, payments won’t soon move the needle for Apple; the tech giant had fiscal 2014 sales of $183 billion.APPLE PAY COULD, THOUGH, SPUR a new wave of payment-equipment upgrades. Merchants are wary about being the next Target or Home Depot. Those chains were victims of hacker attacks in the past year that exposed nearly 100 million credit and debit cards. The breach led to the resignation of Target’s CEO. A technology like Apple Pay wouldn’t have stopped the attacks, but it would have made the data obtained by hackers basically useless (see “Taking Apple Pay for a Spin,” Gadget of the Week)....MORE
