Financial institutions always dominated the facilitation of transactions back in the day. But these days, the e-payments market is booming. It is growing so fast that fintech firms specializing in payment processing continue to take on new markets. The obvious but relevant players among payments stocks are credit card companies. But what are the other big e-processing firms that investors should look at?
These seven payments stocks in particular are up significantly over the last few years. The strong growth in e-processing will only continue. This increases the profit potential as consumers and businesses demand that more transactions get done online or electronically.
Payments Stocks to Buy: PayPal (PYPL)
PayPal (NASDAQ:PYPL) separated from eBay (NASDAQ:EBAY) and for a while, the uncertainty hurt PYPL stock. But since then, the stock is up around 21% year to date after demonstrating strong growth in the last quarter.
In Q3, PayPal reported a non-GAAP EPS of 61 cents. Revenue grew 19% year over year to $4.38 billion. The payments processing firm has no trouble competing against the incumbent banks and credit card companies. And despite the fact that the economy is headed toward a recession, PayPal grew revenue and profits.
The company forecast 2019 EPS of $3.06 – $3.08, above the analyst consensus estimates of $3.02. PayPal is crushing expectations because the site is easy to use. More users are signing onto the service to facilitate money transfer. Furthermore, as reported by PayPal CEO Dan Schulman in the company’s latest earnings call: “Last year we acquired Hyperwallet knowing that payouts are a powerful tool for fueling engagement as retailers and marketplaces look for new ways to interact with their customers.” PayPal counts Travellers Insurance as one of the firms using PayPal to send insurance claims.
PayPal also reported that it bought back $350 million in shares to increase shareholder returns. And it “accessed the public debt markets for the first time, raising $5 billion in gross proceeds.” So, at an average interest rate of 2.56%, the cost for managing the debt is minimal.
PayPal now has 300 million active accounts. And because merchants appreciate the scale PayPal has, more sellers are signing on the payments processing site. User growth is so healthy that losing exclusivity on eBay is a non-event. PYPL stock is around 15% below its 52-week high but could rebound. After the holiday season, strong transaction growth may give the stock a positive boost.
Square (NYSE:SQ) stock hovered at $60 between August and November before trending higher. Strong third-quarter results encouraged investors to buy the stock again. The company reported gross payment volume growing 25% year over year. Earnings per share of 25 cents is above the 20 cent consensus average estimate. Adjusted EBITDA will be ~30% for the full-year 2019.
Cash App is a bright spot for Square. Revenue grew 115% to $159 million. The App redesign in Q3 helped drive usage higher. Square also added investing. That means Cash App users may buy stocks instantly and for free (when the stock market is open).
In SQ’s Q3 earnings call, CFO Amrita Ahuja reported that “total net revenue grew 44% year-over-year to $1.27 billion.” That means investors should expect the pace of strong performance to continue. According to Square, its “marketing campaigns this year have driven an uplift across key indicators, including awareness, web traffic and revenue contribution from new seller cohorts.” And the company lowered hardware pricing for Square Register and Square Terminal, which led to a lift in unit sales.
Square expects revenue growth in the 30% range in 2020. Its investments in sales and marketing will cost over $75 million. The payback period for this higher cost is four quarters. An office expansion will cost another $50 million in expenses.
Strong revenue growth ahead and a gross profit rate growth of 37% suggests that the $71.17 price target (compiled from Tipranks) is reasonable. In 2020, profits may lag due to the higher costs but after that, SQ shareholders should expect profit growth accelerating next. In addition, Cash App is becoming a bigger contributor to the company’s results. This should lead to positive revenue retention in the years ahead.
StoneCo (NASDAQ:STNE) is not a household name to U.S. investors. The firm is really an application software company that facilitates commerce across in-store, online and mobile channels in Brazil. STNE stock soared 20% when the company reported strong Q3 results.
StoneCo added 69,000 clients in the quarter and now has 429,000 active merchants. Revenue grew 62% year over year, helped by its logistics (Green Angels) delivering point of sale on average in less than a day. Having IPO’d just one year ago, StoneCo continues to perform well. Adjusted net margin doubled to over 30%, above the 16% margin in the last 12 months prior to its IPO.
SMB client growth in Brazil continues to accelerate. As the company reported on its latest earnings call “[i]n the third quarter, we have accelerated our net adds, reaching a record of 68,700 compared to 50,500 in the prior quarter.” And although StoneCo’s “acquiring, banking and credit solutions are [currently] offered separately from each other,” it’s aiming to integrate them on a single platform.
This move should help improve the performance of its business, since practically speaking, merchants need all of their services, including bill payments, wire transfers, credit lines and cash flow control, under a single platform. The valuations on STNE stock are high, but when the company succeeds in offering such a unique platform, it will have a strong moat. Competitors will have trouble taking StoneCo’s business away.
Visa (NYSE:V) shares are hovering at 52-week highs, pausing for now before potentially moving higher. The company reported results so strong in the latest quarter that Visa hiked its dividends by 20%, to 30 cents per quarter. Most impressive is that even after the dividend hike, the payout ratio is still a healthy 20%. Visa is clearly a cash machine for investors.
Visa owes its success to focusing on the customer and having a strong network of partners. It grew topline results and has plenty of funds to invest back in the business. In its Q4 report, the company processed over 47 billion payment transactions, up 5.3 billion or 12.6% higher than last year. Payment volume grew 9% globally (10% when China is excluded).
To further facilitate transactions, Visa improved the point-of-sale experience. Its current card continues to benefit from the tap-to-pay action. But in the future, SRC or secure remote commerce will streamline the digital payment experience across networks. With higher security and improved sales, click-to-pay that is enabled by SRC will lead to more transactions.
V stock may trade at elevated multiples (with a P/E of 35X) but analysts are bullish. The average price target is $206 (per Tipranks).
Mastercard (NYSE:MA) reported a 14.1% revenue increase year over year in its third quarter. Gross dollar volume grew in the double digits, up 12% year over year in the U.S. and up 16% in the rest of the world.
The credit card company enjoyed continued strong consumer spending in the year. Retail sales in the U.S. are consistent, up 3.8% from last year, that the company has no reason to forecast any downturn ahead.
Mastercard’s core products are driving growth in the credit, debit, prepaid and commercial markets. After extending its global agreement with Citigroup (NYSE:C) for another five years through 2029, expect strong stock performance with the uncertainty removed. Mastercard will extend the partnership by increasing services to Citi’s corporate clients. By including the use of Mastercard’s payment gateway, the closer partnership will drive transactions higher.
As MA asserts in its latest earnings call, “these position us to partner even more closely over the next decade on digital initiatives, on driving consumer credit and debit growth on B2B and the development of new payment solutions and joint marketing efforts to continue growing our businesses together.”
Mastercard currently has a digital initiative called click-to-pay in the U.S. This EMV secure remote commerce standard will enable a faster, secure, checkout experience for online users. Website and mobile and mobile apps will have secure transactions.
Click-to-pay will have a broader market launch in the first half of 2020. Merchants also benefit from NuDetect, a Mastercard AI and merchant machine learning solution. Both consumers and merchants will get added security from NuDetect as they pay via Mastercard and check out.
MA stock trades at a premium valuation and is near its 52-week high. Strong holiday seasonal strength may lead to record levels of transactions, lifting the stock higher.
Coupa Software (COUP)
Coupa Software (NASDAQ:COUP) reported earnings of 7 cents a share non-GAAP as revenue rose 54.3% to $93.14 million. The business is growing briskly because it offers value as a service to its customers. Corporations using Coupa have better viability and tighter control in accounts payable. Under Coupa BSM, customers may manage to spend under the platform.
Shopify (NYSE:SHOP) rolled out Coupa’s commerce platform to handle spend and add spending controls. But Coupa Pay is unlike any other payment solutions in the market. It sits on top of the supplier master record and the supplier invoice transaction. So, this increases the effectiveness of payment processing.
For Q3/2020, thanks to accelerating customer payments, Coupa forecasts total revenue of between $95 million and $96.5 million. Its customers are highly enthusiastic about their range of products. For example, virtual cards and invoice payment will increase Coupa’s long-term revenue potential. Its software does much of the heavy lifting in the host’s ERP system. By delivering higher efficiency in the processing, its customers see the value in having Coupa solution.
Coupa’s enterprise sales team continues to execute. From the mid-market to the professional services team, the company may reasonably expect the staff closing more details in the quarters ahead. The strong top-line performance will lift profit margins, too.
Coupa Pay has a large market to go after. And as customer growth adds to cash flow growth, the company will reinvest the funds back into the business. Acquisitions are unlikely in the short term since Coupa is still integrating past acquisitions into the business. For example, its integration of Exari raised expenses and had minimal revenue contribution. In the long term, this should position the company well, strengthening its offerings to customers.
Apple (NASDAQ:AAPL) Pay is a big business opportunity for Apple and it keeps getting better. Steady iPhone sales ensure continued transaction growth for years to come.
In Q4, Apple reported all-time record revenues from payment services. As MacRumors reports,”[F]or Apple Pay, revenue and transactions more than doubled year over year with more than 3 billion transactions.” This easily beat PayPal’s numbers and is growing four times faster. Apple Pay is now in 49 markets worldwide and has over 6,000 issuers on the platform. In August, the company launched Apple Card. Users may easily apply for the card in minutes through the Apple wallet app and they can start using it right away on websites, stores and apps.
Apple Card has no fees and is secure and transparent. Merchants like Walgreens Boots Alliance (NASDAQ:WBA), Uber (NYSE:UBER), Uber Eats and T-Mobile (NASDAQ:TMUS) offers a 3% daily cash back on Apple Card transactions. To cross-sell the card and its product, Apple allows customers to buy a new iPhone with the Card and to pay for it over 24 months with no interest charges.
Apple reported over $46 billion in services revenue in Q4 and Apple Card will eventually add meaningfully to those results. Among all the payment services firms listed, Apple stock has the lowest P/E ratio. Investors do not assign a premium to its Card services and Apple Pay transaction volumes. But over time, these two payment services will become a big part of Apple’s business.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.