The Great Vending Machine Upgrade
One of the things I love about being chief analyst of Cabot Small-Cap Confidential is the quest for the next great undiscovered small-cap growth stock. It’s like a never-ending treasure hunt, with occasional massive discoveries. And I have the freedom to search anywhere in the world!
That means I’m often looking at business sectors that most investment analysts skip right over.
A perfect example is the vending machine market, also known as the unassisted point-of-sale (POS) market. I’m fairly sure there are not a lot of people at cocktail parties throwing out stats from Vending Times magazine about the big product launches for summer 2016 (maybe that’s why I don’t go to many cocktail parties!). It’s more likely they’re talking about the next Apple (AAPL) iPhone or breaking technology from Alphabet (GOOGL).
But I think there’s far more opportunity in undiscovered small-cap growth stocks dominating lesser-followed markets. For instance, it’s possible to invest in a company that’s advancing a major technology for vending machines—electronic payments. And in fact, even Apple, Google and Samsung are playing a role in this emerging trend.
To understand why there is such high demand for this technology, you only need to ponder the simple question: Why do most vending machines still require coins and bills?
The Hunt for Spare Change is Over
Across North America, businesses have almost universally moved to electronic payments. By going electronic, they remove a huge stumbling block from the sales process. And they increase the dollar amount of each transaction.
The next wave of mobile payment methods is only making cash seem more ancient. With advances in Near Field Communication (NFC), biometrics and digital wallet security, services such as Android Pay and Apple Pay could overtake credit and debit cards as the leading choice for consumers within the next decade.
Yet most food, beverage, laundry and other vending machines are stuck in the dark ages, forcing consumers to dig through pockets and cars to find random coins. If you’re anything like me—and millions of other Americans—you’re apt to give up the hunt. Most times you don’t have the right change anyway.
One of the historical problems for vending machines has been a lack of reliable network connections. Ethernet jacks aren’t necessarily available in the best vending locations. Machines are often moved, exacerbating the problem. Wireless networks might be available, but operators don’t always own the real estate that their machines sit on, so gaining access isn’t a sure bet. But the vending machine industry is finally coming into the modern age. Operators no longer have to sacrifice location and flexibility to accept electronic payments. Equipped with the right devices, modern vending machines can use cellular, wireless or Ethernet connections to accept electronic payments just about anywhere in the world.
The technologies making this possible are wireless telemetry and machine-to-machine (M2M) communication, both of which are now very affordable and highly reliable. Moreover, these technologies mean sales, inventory and maintenance reports can be accessed remotely. That data is as good as gold, and can help vending machine operators maximize revenue from every machine they own.
Operators can now see that they are missing out on millions of dollars of potential sales if they don’t accept electronic payments. And with digital wallet use growing, machines that only accept cash have fallen two technology generations behind the curve.
As this entire industry begins to change over to electronic payments, there is a massive opportunity in those select small cap companies that sell equipment and services. They can bring electronic payments to every street corner of the country.
Consider some of these statistics.
There are estimated to be over 5.5 million vending machines in the U.S. alone, processing around $60 billion in transactions annually. Only around 10% of them accept electronic payments.
There are even more kiosks then vending machines in the U.S. And they process bigger ticket payments, estimated to total $1 trillion annually. There are another 2.5 million commercial washers and dryers generating $5 billion in annual sales.
Add it all up and you have around 15 million unattended machines that could buy electronic payment devices and/or supporting services. Why on earth would all of these vending machine owners want to rely on chance encounters with cash, when they could just take a card or mobile payment?
They won’t. The entire industry is moving toward electronic payments. Old machines are being retrofitted, and new machines are rolling out with integrated electronic payment modules.
Not only will this technology make it easier for consumers to make a purchase they otherwise wouldn’t, it will open up new markets for vending machine goods. For instance, I’ve heard that this summer will bring a new type of vending machine for dispensing frozen yogurt. Get ready!
300% Earnings Growth from Electronic Payments
I’m constantly on the hunt for the titans of off-the-beaten-path industries. And I cover those poised to dominate in Cabot Small-Cap Confidential 2.0. Recently, I’ve uncovered one small-cap growth stock that is helping to move the vending machine industry from a cash-only payment business to one that accepts electronic payments.
The company has been especially focused on the mobile payment market—including Apple Pay, Android Pay and Chase Wallet. In fact, over 90% its connections take mobile payments right now. And with sales taking off, this company should grow earnings by 300% in 2016.
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