Markets

A Stock To Ride The Buyout Boom In This $1.5 Trillion Industry

The name of the game is electronic payments. Metal coins, paper money and plastic cards are increasingly becoming a thing of the past.

Worldwide online retail sales, also known as business-to-consumer ecommerce, are expected to reach $1.5 trillion by year's end -- and that number is only going to grow over the next few years , according to eMarketer's recent forecast.

As bits and bytes replace material money, a land grab is taking place among firms looking to stay ahead of the curve in the electronic payment space. A recent flurry of M&A activity led me to look for the next acquisition candidate.

For reference, Ebay's most profitable venture, Paypal, which has been a dominant force in mobile payments since its founding in 1999, has recently started making waves again.

Recognizing the continuous challenge to be at the forefront of the mobile payments revolution, PayPal has been scooping up mobile payment firms left and right. In fact, over the last two years they've acquired 8 different payments companies .

Most notably, eBay paid an eight-times price-to-sales multiple , or $800 million, for Braintree, a global payment platform that facilitates mobile and ecommerce payments. Essentially, the company paid $8 for every $1 in Braintree revenue.

With a multiple like that, it's hard not to begin scouring the payments space for other disruptive companies in the crosshairs of the big tech firms such as Google, Amazon, Apple and the like.

And I'm not the only one who's interested in the M&A activity in the payments arena. Billionaire activist investor Carl Icahn saw so much value in the space that he's built a 2.5% stake in eBay and lobbied for Paypal to spinoff as its own company.

While eBay is a great way to hop on board the electronic payments boom -- There are a handful of unrecognized companies out there just waiting to be acquired by the big players . These smaller companies offer a more direct entrance into this evolving industry.

One of these unrecognized up and comers, Planet Payment, Inc. (Nasdaq: PLPM) , caught my eye.

Planet Payment is a leading electronic global payment and transaction processors . As commerce increasingly crosses international borders, PLPM's platform allows merchants the ability to receive payments in any currency. They specialize in point-of-sale transactions and more interestingly the eCommerce and mobile channels.

But why do I love this specific company so much right now?

1) Client base & specialization

Their offerings provide value to some of the biggest players in the payment world. Financial giants like Visa, CapitalOne, and Citibank utilize PLPM's product offerings. That's a vote of confidence I need to see with these smaller, potential acquisition targets.

Beyond having the major industry players as customers, Planet Payment is set up in 20 different countries, services a diversified client base of almost 70 large financial intermediaries, and provides those services for cheaper than it costs large companies to keep the process in house. An established international infrastructure is a key asset that large companies would be willing to pay up for.

2) Strong financial performance

PLPM's growth can be looked at as a function of the number of merchant locations and the number of transactions processed. Over the last four years, PLPM averaged 30% annual growth in the number of transactions processed and has grown its number of active merchant locations by an average of 43% per year.

This usage growth led to a steady 12% average revenue growth rate over the last five years. Although the company has been investing heavily in developing their user base, it didn't always materialize into bottom line earnings -- until recently.

As of their most recent quarter their earnings per share doubled year over year.

Even more upside is ahead, according to management. During its Q2 earnings call, the company guided 2014 revenue to jump between 12% and 18% and they anticipate further earnings growth.

We can check the boxes: growing revenue, increased profitability and a strong customer base. But as most market experts will tell you, and as an investment tenant I live by: it all comes down to valuation.

3) Valuation

As I stated above, eBay paid an eight-times P/S multiple for their most recent acquisition. Even more lofty was the recent Intuit (Nasdaq: INTU ) acquisition of mobile payment firm, Check, for 18-times sales.

But let's stay a bit more conservative and value PLPM using the eight-times P/S multiple. Applying that multiple to management's 2014 revenue guidance, PLPM shares would be valued north of $7. That's 185% higher than where the stock is trading now.

Risks to consider: PLPM is a micro-cap company, which comes with extra risk given its size. The stock can move rapidly based on any changes in the company's outlook. PLPM has given revenue and earnings guidance for the full year, and if they miss guidance, the stock has the potential to sell off.

Action to Take --> Since announcing their second quarter earnings results a couple of weeks ago, PLPM stock is up 15%, and there's still plenty of potential gains ahead. They just posted arguably their best quarter of the year, but the stock is still trading almost 40% below its 52 week high. If M&A activity continues, then this would be a prime stock for a takeover. Buy and hold with a stop loss in accordance with your risk tolerance.

The innovation in the electronic payments space is a true game-changer... and if it's got you excited, you should see what my colleague Andy Obermueller has been working on. His new report 11 Shocking Predictions for 2015 details 11 under-the-radar investment opportunities that could earn you up to 92%... 293%... even 310% gains in just a year. To get all of Andy's predictions -- including how a tech giant's next breakthrough could threaten the entire banking industry in 2015 -- click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.