At the height of the market selloff in March, credit card and electronic payment processing companies slid to yearly lows. That bearishness proved short-lived when many of those electronic payments stocks recouped nearly all of those losses.
Economic shutdown or not, the world still needs ways to process payments. And as people shift away from paying merchants in person with physical cash, electronic payment volumes will soar in the post-Covid-19 era.
So, what are the electronic payment stocks to ring up now? There are seven companies to consider:
- PayPal Holdings (NASDAQ:PYPL)
- Square (NYSE:SQ)
- Visa (NYSE:V)
- Mastercard (NYSE:MA)
- American Express (NYSE:AXP)
- Coupa Software (NASDAQ:COUP)
- Global Payments (NYSE:GPN)
Though these stocks have largely recovered, investors should brace for modest transaction volumes during the lockdown. The second quarter will encompass much of the economic slowdown, meaning the market is probably too eager in forecasting a return of last year’s golden age. More likely, a full recovery will not play out for another year at the very least.
PayPal Holdings (PYPL)
PayPal reported non-GAAP earnings of 8 cents a share. Revenue grew by 11.9% year-on-year to $4.62 billion in the first quarter. The e-payment giant added 20.2 million net new active accounts. This number is inflated by a one-time addition of 10.2 million users from its Honey acquisition.
However, a word of caution. The 32 cents a share in annualized earnings (8 cents times four quarters) suggests an unsustainably high valuation on PayPal stock.
Besides, the stock already trades near the Wall Street average target price of $140 (per Tipranks). The stock has a low-value score but scores highly in other measures:
Data courtesy of Stock Rover
PayPal benefited from a record revenue growth of 35% for its PayPal checkout experiences. Still, management acknowledged that revenue fell due to shelter-in-place and social distancing. For example, travel and ticketing verticals suffered. In contrast, toward the end of March and in April, its daily net new actives and overall engagement levels grew.
The company said that “our market research indicates in approximate 50% lift in consumer willingness to buy when PayPal is present at checkout. On average, merchants who accept PayPal experienced a 60% increase in purchase conversion.“
Square has nearly doubled in value since the stock bottomed in late-March and just after its earnings report posted on May 6, 2020. The company posted gross payment volume growing by 14% Y/Y to $25.7 billion. Square lost two cents a share on a non-GAAP basis.
In the first quarter, Square’s revenue grew by 43.9% to $1.38 billion. And even though a quarterly loss should send the stock lower, that didn’t happen. Selling Square stock at the top and waiting for shares to fall at $40 may pay off best. Had shares not risen by so much, investors could accumulate them at current levels.
Square’s long-term prospects benefit from its differentiated Seller ecosystem. For example, sellers may switch between offline and online commerce in the current Covid-19 pandemic environment. Meanwhile, its Cash App is creating a new experience that works for customers.
The company said they have “expanded the addressable market opportunity as customers have increased their adoption of those products, their lifetime value has increased, which has driven improvements in Cash App’s profitability over time.”
Investors may assume a modest revenue growth of 25% annually in a 5-year DCF growth exit model. In this financial model, SQ stock is worth over $80 a share (see the finbox model here).
Visa may conjure the mental image of a traditional plastic credit card company. Yet its early embrace of electronic payments assures long-term growth ahead.
Visa posted earnings of $1.38 a share in the second quarter. Revenue rose by 6.6% to $5.85 billion, despite the stay-at-home order. People in lockdown still need to use their credit cards to shop. Visa still needed to run at a 22.6% client incentive as a percentage of gross revenue. The company also said that it needed these client incentives due to high renewal activity.
Visa withdrew its prior fiscal 2020 outlook in light of the global Covid-19 pandemic. Investors will need to look at three critical variables. Per management, those variables are “first, the depth of the decline, second, the time we stay at trough level, and third, the trajectory of the recovery.”
And since forecasting any of those variables is impossible, investors should watch those numbers regularly. Visa posted strong Q2 payment volume growth in credit and debt (at constant currency). When the lockdown eases in phases, payment volumes will grow sharply higher.
Mastercard reported a 2.8% Y/Y revenue growth in the first quarter. Further, MA stock earned $1.68 a share, once again demonstrating why this company is great.
Still, investors will notice that even after a 7% increase in operating expenses, EPS still grew by 3% (slide 3). Although the transaction volumes sank in April, Mastercard’s growth in electronic payments will continue. Management said in the Q1 conference call that “the secular shift from cash and check to electronic forms of payment is important and expected to accelerate coming out of this crisis.”
Electronic payments will create new revenue streams for the credit card firm. As it captures new payment flows, the business will benefit from a diversified customer base and a wider geographic reach.
Plus, Covid-19 in driving a need to reduce cash-based transactions. Eventually, digital solutions will displace cash and even electronic payments. This will drive Mastercard’s digital solutions. That includes its gateway and digital debit products.
On Wall Street, 18 of the 21 analysts rate MA stock as a “buy” with a $312.21 average price target. In my financial model, I assume the following revenue growth:
|(USD in millions)||Input Projections|
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
Data courtesy of finbox.
This implies a fair value of $327.
American Express (AXP)
American Express lagged compared to the others listed above. Revenue fell 0.5% Y/Y to $10.31 billion. It earned $1.98 a share (non-GAAP) in the first quarter. Still, the company is integrating and developing new digital capabilities.
AXP boosted its growth prospects by acquiring new merchants globally. It continued to launch its new network in China to increase its addressable market. American Express has a good chance of structuring its business for future growth.
For example, the company has a Merchant Network and a differentiated business model to build upon. Given the uncertain environment, the company has worked to trim unnecessary costs. It stopped traditional marketing and advertising. Customer acquisition activities will also end.
AXP will speed up its investments in mobile, servicing and credit and collections. Conversely, its provisions and lower discount revenue are headwinds that the company must work through. Fortunately, AXP will not cut jobs, which suggests that the staff is well-positioned for work in a virtual environment. It also implies that the company may carry out its electronic transaction projects without any disruptions.
Coupa Software (COUP)
Coupa Software is in the early phases with Coupa Pay, though it is seeing strong momentum. In the Q4/2020 period, Coupa added many new customers during its early deployment.
The Pay module gives Coupa customers a core transactional module for its Business Spend Management (BSM) platform. An example of its implementation is with companies like Enterprise National and Alamo Rent-a-Car. Enterprise has 100,000 team members located in 100 countries managing over 2 million automobiles. Enterprise is adding the Coupa platform, which will connect its suppliers via Coupa Pay.
Before the virus crisis, the company said that “over 100 customers transacting millions of suppliers around the world managing their business spending in our opportunity to get into that environment and drive more and more value, whether it’s free in this case to support cause or whether it’s needed for us to continue to grow our business via an alternate strategy that presents itself.”
More recently, to help customers cope with Covid-19, Coupa said they could use the company’s Digital Checks service for no extra charge.
Global Payments (GPN)
Global Payments is a worldwide leader in near-field communication (NFC); think Apple Pay and other such payment methods. As social distancing and no-contact commerce become the norm now and long into the future, the company’s NFC deployment will drive electronic transaction growth volume.
Global Payments enables contactless transactions for its merchant customers. The company has also positioned itself to grow as the secular shift from cash to electronic forms of payment unfolds.
In the first quarter, the company posted an adjusted operating margin expanding to 39%. Pivoting toward the cloud and finding efficiencies lifted margins by 430 basis points. Transaction volumes grew in the mid-single digits, thanks to the addition of 13 million accounts in the first quarter.
The firm saw merchant business stabilize starting in April. IT benefited from the recent opening markets, including China and Central Europe. Restrictions on travel spending by governments and corporations hurt transaction volumes.
Still, Global Payments may offset its exposure to transaction volumes declines. It offers bundled solutions to drive sales. Plus, the stimulus will benefit its business and consumer customers.
Investors could easily build a 10-year DCF Growth Exit model for GPN stock. Per finbox, the stock is worth close to $200 a share.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.