If you want to find the big stock winners for the next decade, take a look at powerful growth trends coming out of the global pandemic and see which ones represent longterm changes. Top Wall Street analyst Lisa Ellis thinks that paying with cash is about to go the way of rotary phones, fax machines and VHS tapes. That’s a bonanza for digital-payment companies whose technology offers lightning-fast and efficient ways to exchange money.
While the use of paper bills and coins has waned for years, fears about the physical transmission of coronavirus encouraged millions of consumers to embrace alternatives to exchanging cash, including ordering groceries online…using “digital wallets” to store and access money electronically…and carrying “contactless” credit cards and smartphone apps to transmit payment information. And with each transaction, the service providers receive a fee.
The result is a global digital-payment industry that’s expected to reach $23.1 trillion in transactions in 2021. In the US, transactions could hit $7.5 trillion this year—a 40% increase in just two years—and rise to $10.5 trillion by 2025.
Another reason to invest in the accelerating death of cash: The winners have already emerged. While there will continue to be startups, the digital-payment market is dominated by a handful of companies that are likely to grow larger and more profitable in the coming years as using cash grows increasingly rare, not just in the US but all over the world.
Bottom Line Personal asked digital-payment expert Lisa Ellis for her on this revolution and the types of companies she covers if investors are interested in doing further research… ‘
3 WAYS TO GAIN EXPOSURE
For growth-oriented investors…
Pure-play payment processors: These businesses exist mostly as apps on your computer, laptop or mobile phone and are used for Internet commerce and digital-cash exchange. They allow you to buy items online with a click of a button or in physical locations by scanning a QR code with your mobile phone. You also can make “peer to peer” (P2P) payments using a digital wallet to send and receive money to and from friends, family members and businesses with just a cell-phone number or an e-mail address. Some pure-play companies also enable small businesses to accept credit card and digital payments from consumers.
Outlook: These companies are among the industry’s most exciting and fastestgrowing players. They were ideally positioned at the start of the pandemic to benefit from housebound consumers flocking to e-commerce and P2P payments. Their stocks soared last year but have relatively high valuations now and will experience ups and downs going forward because expectations are so high.
Examples of pure-play payment processors that I cover…
PayPal (PYPL) is the leader in online payments with more than 390 million active users. Its P2P service—Venmo— and PayPal Checkout button on almost every top retailer’s website led to nearly $1 trillion in total payment volume last year, with profits tripling in the fourth quarter of 2020 year over year. PayPal recently started offering specialty services including Honey, a deal-finding tool to help shoppers seek low prices and earn rewards for online purchases. 2020 return: 117%. Year-to-date return: 25.9%.* Recent share price: $294.85.
Square (SQ). Founded by Twitter CEO Jack Dorsey, the company is best known for its pocket-sized, white card reader that plugs into laptops or smartphones, allowing small merchants to process credit card payments face-to-face or over the Internet. Square software also helps merchants collect payments, manage invoices, offer gift cards and prepare their taxes.
But it’s Square’s second business, Cash App—an innovative P2P payment network of more than 30 million users— that sent the company’s stock rocketing upward in 2020. Cash App offers a wide array of services, including its popular Boost rewards program and the ability to buy and sell stocks. Square customers also used Cash App to receive more than $820 million in federal stimulus payments last year. 2020 return: 248%. Year-to-date return: 7.37%. Recent share price: $233.69.
For investors looking to add blue-chip global giants to their portfolios…
Credit and debit card processors: Most investors are familiar with these global companies, which perform the authorization, clearance and settlement functions for transactions between banks that issue plastic cards and banks of merchants that accept the cards. Technology such as contactless cards embedded with radio chips is enhancing the volume and frequency of purchases that consumers charge. The companies also sell many related business services ranging from data analytics to fraud prevention.
Outlook: These companies should see strong, steady post-pandemic growth, and their valuations still are reasonable because the stocks showed mixed results last year. While credit and debit card processors got a boost in business from e-commerce purchases, that didn’t offset the dramatic slowdowns in entertainment and overseas travel spending. I expect those areas to begin to rebound strongly in 2021, as well as show continued future expansion in emerging markets, where credit and debit card penetration still is low.
Examples of credit and debit card processors that I cover…
Mastercard (MA) is the second-largest payment processor in the world, handling more than $4.7 trillion in annual transactions. It is likely to grow modestly faster over time than Visa due to its smaller size and relatively higher presence in underpenetrated overseas markets, especially Europe. 2020 return: 20%. Year-to-date return: 2.75%. Recent share price: $365.45.
Visa (V) processes almost $9 trillion in transactions a year, linking 70 million sellers with 3.5 billion credit and debit cards. The stock is suffering shortterm headwinds, including a US Justice Department investigation for anticompetitive behavior in the debit card space. But I don’t think that hurts its long-term potential, which includes upside from Visa’s new payment product Visa Direct. 2020 return: 17%. Year-to-date return: 10.2%. Recent share price: $240.41.
For value-oriented investors…
Traditional merchant and bank payment processors: These companies focus on processing payments for financial institutions and traditional brick-and-mortar merchants rather than online consumers. They process transactions behind the scenes at fastfood restaurants and clothing and grocery stores…and they provide payment solutions and software technology for banks processing bill-payment, lending and Automated Clearing House (ACH) transfers, the electronic network in which money moves between banks.
Outlook: These companies don’t have the spectacular growth or services of other digital-payment industry players, but they will play a vital role in the future and their stocks trade at attractive valuations. The stocks struggled last year when investors were nervous that these companies would suffer as purchases moved online, but they’ve done just fine. The industry also was rocked by a wave of mega-mergers over the past few years as competitors consolidated to gain market share. Recovery will be gradual as brickand- mortar sales bounce back and the mergers add revenue and cost synergies.
Example of a merchant and bank payment processor that I cover…
Fiserv (FISV) controls about onethird of the US market share for traditional merchant and bank processing, including many top quick-service restaurants such as McDonald’s and Burger King and hundreds of small and midsize banks. The company’s $22 billion acquisition of payment processor First Data in 2019 will broaden its exposure to brick-and-mortar merchants and should result in cost savings of hundreds of millions of dollars annually. 2020 return: –1.5%. Year-to-date return: –6.32%. Recent share price: $106.66.