While the COVID-19 pandemic significantly affected multiple sectors, it acted as a tailwind for companies in the digital payment space. Digital payments were already growing before the coronavirus pandemic, but stay-at-home orders and the push for social distancing have accelerated this trend. Mastercard Incorporated (MA), one of the largest global technology-based payment companies, has benefited from the growing adoption of remote transactions. Consequently, MA’s shares have gained 10% so far this year. However, there seems to be a disconnect between MA’s share price and financial reality, and the stock is losing its short-term appeal.
MA’s financials have suffered due to the staggered global shutdowns and travel bans this year. Net revenue in the last reported third quarter decreased 14% year-over-year to $3.8 billion, primarily due to a 36% decline in cross-border volume. EPS for the quarter came in $1.51, declining 27% year-over-year. Furthermore, analysts expect MA’s current year revenue and EPS to fall 9.8% and 18.1%, respectively.
Though the nation is celebrating the roll-out of COVID-19 vaccines, new travel restrictions are being imposed globally, thanks to the recently discovered new strain of the virus in the UK. Hence, it is wise to shift the spotlight off MA and focus on shares of digital payment companies like Visa Inc. (V), PayPal Holdings, Inc. (PYPL) and Square, Inc. (SQ) that may continue to soar based on their growing market share.
Visa Inc. (V)
V is a global payments technology company enabling people to use digital currency. The company facilitates commerce through the transfer of value and information. It operates VisaNet, a processing network that enables settlement of payment transactions. In addition, the company offers card products, as well as value-added services.
V announced a strategic partnership with Conferma Pay, a virtual payments technology provider, last month to launch Visa Commercial Pay, a suite of B2B payment solutions, to help improve cash flow for businesses and eliminate outdated manual processes. The company also acquired YellowPepper, a fintech pioneer with proprietary technology and partnerships supporting leading financial institutions and startups, in the same month. This acquisition is accelerating the adoption of V’s “network of networks” strategy.
V’s revenue and EPS grew at a CAGR of 6% and 20.5%, respectively, over the past 3 years. In the fiscal fourth quarter that ended in September, the company reported net revenue of $5.1 billion, falling 17% year-over-year as total cross-border volume weakened. However, payments volume increased 4%, while processed transactions surged 3% over the prior year on a constant-dollar basis. Non-GAAP EPS came in at $1.12, declining 23% year-over-year.
V is up 9.3% so far this year. The company has largely benefited from the spike in e-commerce sales this year. V is rapidly expanding its Visa Direct program and B2B partnerships, and has made significant progress in advancing its growth strategy through acquisitions and alliances. Consequently, analysts expect V’s revenue and EPS to grow 17.1% and 25.1%, respectively, next year.
How does V stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
B for Industry Rank
A for Overall POWR Rating.
It is ranked #1 of 47 stocks in the Consumer Financial Services industry.
PayPal Holdings, Inc. (PYPL)
PYPL is one of the most popular digital payment operating technology platforms that enables digital and mobile payments on behalf of consumers and merchants worldwide. It has over 361 million active users globally and is available in more than 200 markets around the world, enabling consumers and merchants to receive money in more than 100 currencies.
As part of the second round of government-issued paper stimulus checks, PYPL has waived the check-cashing fees associated with its cash-a-check feature on PayPal and Venmo, enabling its customers to access funds remotely, free-of-charge. Moreover, in line with the spike in the crypto rates and popularity in recent years, PYPL launched a new service enabling its customers to trade cryptocurrencies directly from their PayPal account in October.
Over the past three years, PYPL’s revenue and EPS grew at a CAGR of 18% and 27.5%, respectively. In the third quarter, PYPL added more than 15.2 million new accounts. The top-line increased 25% year-over-year to $5.46 billion. The company witnessed a total payment volume (TPV) of $247 billion, growing 38% from the year-ago quarter. Merchant Services volume surged 40%, and represented 93% of TPV. EPS for the quarter came in at $0.86, rising 121% year-over-year.
PYPL has gained 121.4% so far this year as it is witnessing encouraging progress in the trajectory of domestic spending. The shift to digital payments is one of the major trends that should only accelerate over the next couple of decades. Hence, analysts expect PYPL’s current year revenue and EPS to rise 20.5% and 22.6%, respectively, year-over-year.
It’s no surprise that PYPL is rated a “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade, Buy & Hold Grade and Peer Grade, and a “B” for Industry Rank. It is ranked #2 of 47 stocks in the Consumer Financial Services industry.
Square, Inc. (SQ)
SQ develops and provides payment and point-of-sale solutions in the United States and internationally. It provides Square Register, a point-of-sale system that takes care of digital receipts, inventory, and sales reports, as well as provides analytics and feedback. SQ is the fastest-growing fintech company in terms of digital wallet usage in the US. The company has recently expanded into banking by getting FDIC approval to offer small business loans and consumer financial products on its Cash App platform.
SQ has recently partnered with POWDR, an adventure lifestyle company, to launch its commerce platform that will power payments, e-commerce, and point of sale at renowned ski resorts across the U.S. and Canada to ease holiday spending. Moreover, SQ entered into a definitive agreement with Credit Karma last month to acquire its tax business, Credit Karma Tax, to provide a free, do-it-yourself tax filing service for consumers.
SQ has grown its revenue at a CAGR of 55% in the past three years. In the most recent third quarter, SQ’s net revenue climbed 140% year-over-year to $3 billion on the back of its Cash App ecosystem. The company delivered a record gross profit of $794 million, rising 59% year-over-year. The gross payment volume on the Cash App platform was up 332% year-over-year to $2.9 billion. EPS for the quarter came in at $0.07 compared to the year-ago value of $0.06.
SQ is up 268.7% year-to-date and is arguably the best-known credit card acceptance solutions provider. The company has been efficiently leveraging relentless innovation allowing small companies to accelerate growth even in the midst of a challenging economic backdrop. Analysts expect SQ’s revenue and EPS to rise 38.6% and 47.4%, respectively, next year.
SQ is rated a “Strong Buy” in our POWR Ratings system, consistent with its strong fundamentals. It holds an “A” for Trade Grade, Buy & Hold Grade and Peer Grade, and a “B” for Industry Rank. It is ranked #1 of 262 stocks in the Financial Services (Enterprise) industry.
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V shares were trading at $207.30 per share on Thursday morning, up $2.00 (+0.97%). Year-to-date, V has gained 11.00%, versus a 16.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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