E-commerce and online retail were already booming prior to the novel coronavirus, but with the pandemic forcing temporary closures of many retailers, e-commerce is experiencing years worth of growth in just a matter of months. Payments stocks to buy are going along for the ride.
Entering this year, e-commerce accounted for 11.8% of all U.S. retail sales, indicating that there’s plenty of room for growth and a favorable runway for payments equities. In May alone, domestic online retail sales shattered figures from the 2019 holiday shopping season.
To this point in 2020, domestic e-commerce sales are up 13% year-over-year, but that theme is going to evaporate when Covid-19 is a thing of the past. Data suggest that when the economy reopened a bit in May, card payment transactions modestly increased, but debit and credit use online remained steady. That’s good news for online retailers and good news for payments stocks.
Here are some potential winners among payments equities as more shopping moves to online venues.
- PayPal Holdings (NASDAQ:PYPL)
- Mastercard (NYSE:MA)
- Global Payments (NYSE:GPN)
- Paysign (NASDAQ:PAYS)
- Square (NYSE:SQ)
- Apple (NASDAQ:AAPL)
- Visa (NYSE:V)
Given its long-standing relationship with eBay (NASDAQ:EBAY) – it was spun out from the auction site a few years ago – PayPal is one of the original payments stocks with intimate ties to the e-commerce universe. While PayPal faces competitive challenges on both the business and consumer fronts, the company, it retains enviable positioning throughout the online payments ecosystem.
“PayPal remains a preferred partner in the online space,” according to Morningstar. “Further, the acquisition of iZettle gives the company a viable platform for point-of-sale transactions, and its experience with mobile payments could boost its position on this side as consumers look for more convenient options at the cash register.”
The company’s business- and consumer-facing platforms, though not immune from competition, solidify its footprint in the booming online retail arena. PayPal equips small- to mid-sized business with the infrastructure and point-of-sale systems to accept online payments. The company maintains significant share in the consumer-to-merchant payments arena on platforms like eBay and more.
PayPal is a growth stock and valued as such at 53.48x forward earnings. That’s not necessarily a stretch amid expectations that annual revenue will grow at a compound annual growth rate (CAGR) of 17% over the next five years.
Mastercard is a credit and debit card giant, but there’s more to the story, including the company’s ex-U.S. exposure that includes footprints in regions where online payments are just taking off.
Mastercard is “likely to outpace peers given exposure to Europe and growth markets where MA is gaining share,” says Goldman Sachs.
Mastercard is one of the quintessential payments stocks because it benefits from consumers’ shifting away from cash, a move being hastened by the pandemic.
“Our platform uniquely positions us to support the shift to digital across consumer and business payments that has been accelerated by the COVID-19 pandemic, including an increase in consumers’ preference for contactless payments,” said CEO Ajay Banga in the company’s earnings statement earlier this month.
Additionally, Mastercard is a dividend growth name with the resources to sustain payout growth. That’s a favorable trait at a time when so many S&P 500 components pared dividends in the first half of the year.
Global Payments (GPN)
Global Payments is the dominant name in near-field communication (NFC) – the technology that backs an array of contactless payment solutions. That positions the company to capitalize on the ongoing shift away from cash.
The company is more than five decades old, but in impressive fashion, it’s showing an ability to change with the times. Today, Global Payments is very much a technology company, one focusing on the burgeoning software side of the payments ecosystem. Since 2012, Atlanta-based Global Payments made at least five acquisitions that bolster its technology footprint. This should power about 60% of 2020 revenue.
“Global Payments’ cloud-based issuer processing platform built on AWS will allow financial institutions of all sizes to more seamlessly operate the entire lifecycle of card issuance and management,” according to a statement.
The stock is lagging the broader fintech universe this year, but on a sum-of-the-parts basis, this is probably a $200+ name compared with the $170 area at which it currently resides.
Paysign is a provider of prepaid card programs and processing services, indicating it should be getting a boost from government stimulus and increased collection of unemployment benefits. However, this small-cap name is now a risky payments stock. And not just because of its $508 million market capitalization.
On Aug. 14, the company reported second-quarter results, noting that revenue plunged 25% year-over-year. A near-term headwind for Paysign is plasma donation. Folks that donate plasma are often compensated for doing so via Paysign. However, plasma donations are tumbling due to Covid-19, leading to lower volumes for Paysign.
On that news, the stock fell more than 20% in one day, entering a bear market in the process. Bottom line: Paysign is levered to Covid-19 being defeated and admits as much.
“Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, management cannot reasonably estimate the impact to the Company’s future results of operations, cash flows, or financial condition,” according to the company.
Square’s bread and butter has long been mobile and point-of-sale payment systems for small- to mid-sized businesses, but the company is rapidly growing in other areas. With its CashApp, Square is the most credible competitor to PayPal’s Venmo app in the digital wallet space.
Additionally, Square is increasing its footprint in the mid-market for business loan processing, something that’s been on display this year with the government’s Paycheck Protection Program (PPP). Square eagerly and successfully processed thousands of loans that went overlooked by traditional banks, confirming once again this company is a disruptor to legacy financial firms.
In the e-commerce arena, Square has potentially wide-ranging opportunities because it works with both sellers and platform providers to deliver payment solutions.
There are two fundamental factors that bode well for long-term Square growth. First, users really like the platform. Conversely, most customers don’t really like standard banks. Second, Square consistently shows adaptability. Realizing that some businesses could grow out of the company’s initial product offerings, Square evolved to offering virtual sales programs, online stores, virtual terminals, and customer loyalty programs.
Combine that adaptability with a total addressable market that still isn’t heavily penetrated, and the long-term growth trajectory for Square is enticing.
Through Apple Pay, Apple is a payments stock in its own right. Apple Pay acts as a digital wallet, allowing customers to use contactless payments in a variety of brick-and-mortar settings as well as in iOS apps.
Obviously, the investment community views Apple through the lens of smartphones, tablets and personal computers, among other offerings, but Apple Pay is an increasingly relevant part of the company’s product mix.
By some estimates, Apple Pay currently accounts for 5% of global card transactions, a number that could jump to 10% by 2025. If that 10% number proves accurate, Apple Pay likely generates over $1.1 billion in revenue for the company.
Investors may not have to wait that long. Statista says Apple Pay generated $988 million in global revenues last year and could grow to $4 billion by 2023.
Visa and Mastercard are direct competitors and are beholden to the same market trends. In the coronavirus environment, both are benefiting from the shift to cashless payments and online shopping, but each is being restrained by lack of cross-border transactions, or reduced travel. Payments providers collect higher fees on international transactions, i.e., and American traveling in Europe.
The company confirmed contactless and e-commerce growth in the June quarter, owing to the pandemic.
“We saw growth in debit and in eCommerce volumes in Visa Direct transactions, growth in tap-to-pay and click-to-pay enablement and value-added services revenue,” said CEO Al Kelly.
For long-term investors considering Visa, the good news is that, globally speaking, digital payments topped cash just a few years ago, implying there’s still a long runway for growth. Plus, Visa and Mastercard collect fees regardless of where a customer conducts a transaction, so e-commerce taking share away from physical stores isn’t an issue for these payments stocks.
Todd Shriber has been an InvestorPlace contributor since 2014. He owns shares of Square.