Why Shares of Payment Systems Maker Verifone Plunged 20%

Customers Pay With Contactless Cards
A customer enters their pin number as they make a chip and pin payment via a Verifone Systems Inc. credit card payment device at a restaurant in London, U.K., on Friday, May 22, 2015. Credit and debit cards that can be used by tapping the reader are gaining users, and mobile apps are set to further boost the popularity of contactless paying. Photographer: Simon Dawson/Bloomberg via Getty Images
Bloomberg via Getty Images

Everyone hates the new super-slow checkout systems for credit cards with embedded chips, known as EMV cards. Now some investors are paying the price.

Shares of VeriFone Systems, a leading maker of store checkout systems and credit card readers, plunged as much as 20% on Friday after the company reported disappointing quarterly earnings after the market closed on Thursday.

The sell-off highlights the risk of investing in so-called story stocks in which a stock rises not so much on actual improving financial results but because it appears poised to benefit from some trend or larger narrative. In the case of VeriFone, investors had bought in to the story that retailers would have to upgrade their checkout terminals in droves to comply with new rules from credit card companies intended to encourage the use of chip-enabled cards. The upgrade cycle would, in turn, bolster VeriFone’s sales.

Many larger retailers have converted to chip-enabled systems, but the added delays at checkout for chip card transactions have reduced stores’ speed at getting customers out the door and generated consumer complaints. As a result, medium and smaller retailers—Verifone’s bread and butter customers—have been loath to make upgrade their equipment.

“We now see a significant slowdown in small and medium business terminal upgrades,” CEO Paul Galant told analysts on a call Thursday evening. “And many larger merchants in the U.S. are pushing out orders as they continue to work to integrate software, certify the EMV, pilot their solutions and finally roll out and turn on chip card acceptance. VeriFone has been working diligently to help our clients accelerate their roll outs, but it’s taking longer than anyone expected.”

He also blamed the coup in Turkey, which he said was an important market for VeriFone (PAY).

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VeriFone said sales for its quarter ending July 31 totaled $493 million, while Wall Street expected $516 million. Adjusted earnings per share of 42 cents narrowly beat Wall Street expectations of 40 cents. But the company also shaved its outlook for the next quarter, saying its would earn 28 to 29 cents versus the 50 cents analysts expected and sales would total $2 billion compared to the $2.1 billion previously expected.

Investors may also be frustrated that Friday’s plunge marks the third crash in VeriFone’s stock this year. The shares dropped 20% in the first two weeks of the year, bounced back over subsequent months, only to crater as much as 30% on June 8 after an earlier miserable earnings report.

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