SQ – The pandemic has accelerated the long-term shift toward digital payments. With the number of surging coronavirus infections, safety is a prime concern and shoppers would continue to opt for online shopping this holiday season. Consequently, Visa (V), Mastercard (MA), PayPal Holdings (PYPL), and Square (SQ) are well-positioned to reach new highs.
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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 the trend. Even though the pandemic has made changes in the lifestyle and preferences of people, Americans are geared up to splurge this holiday season.
Decreasing unemployment and progress on a vaccine candidate is spurring hopes of an economic recovery that will boost payment volumes and spending this holiday season. However, it will take time for a vaccine to practically contain the spread of the virus considering manufacturing and distribution challenges. Hence, more shopping will be done online this season than ever before.
US holiday online sales this season are forecasted to surge 33% year-over-year to a record $189 billion, according to Adobe Analytics. It’s also worth noting that the US consumer confidence touched a seven-month high last month. Improvement in consumer sentiment can potentially result in stronger-than-expected sales in the holiday season.
Thus, holiday spending should aid the earnings of the payments industry players. Share of digital payment companies like Visa Inc. (V), Mastercard Incorporated (MA), PayPal Holdings, Inc. (PYPL), and Square, Inc. (SQ) may continue to soar as we look forward to a digital-first holiday season.
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 the settlement of payment transactions. Also, the company offers card products, as well as value-added services.
V launched Visa Tap to Phone, a simple mobile app that can help sellers quickly and securely accept contactless payments, last month. The product is available in more than 15 markets with plans to expand to the United States and accelerate global product growth in the rest of the world via more than 35 new partners. The company recently signed a definitive agreement to acquire YellowPepper, a fintech pioneer with proprietary technology and partnerships supporting leading financial institutions and startups. The acquisition will accelerate the adoption of V’s “network of networks” strategy.
V reported net revenue of $5.1 billion for its fiscal fourth quarter ended September 2020. This implied a 17% year-over-year decline as total cross-border volume weakened 29% in the quarter. Payments volume for the quarter increased 4% while processed transactions surged 3%, over the prior year on a constant-dollar basis. Gross margins came in 80.5% as the total volume of payments and cash transactions for the US Visa Debit program grew 6.8% year-over-year to $667 billion. However, non-GAAP EPS for the quarter came in $1.12, declining 23% year-over-year.
V has made significant progress in advancing its growth strategy. The company is rapidly expanding Visa Direct and B2B partnerships. Hence, the street expects current year EPS to grow 8.1% year-over-year. V closed yesterday’s trading session at $212.70, with a year-to-date gain of 13.2%. The stock is presently trading at a 2.3% discount from its 52-week high of $217.65.
How does V stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
B for Industry Rank
A for Overall POWR Rating.
It is ranked #1 out of 46 stocks in the Consumer Financial Services industry.
Mastercard Incorporated (MA)
MA is a technology company that provides transaction processing and other payment-related products and services in the United States and internationally. It facilitates the processing of payment transactions, including authorization, clearing, and settlement, as well as delivers related products and services.
Federal regulators have recently approved MA’s acquisition of Salt Lake City-based startup Finicity, which provides open-banking APIs. The deal is expected to go for $825 million. MA continues to deliver on its multi-rail strategy with the addition of Account-to-Account (A2A) payments functionality to Mastercard Track Business Payment Service. Moreover, the company has recently announced the expansion of its City Possible network and capabilities, to reach over 500 communities in over 50 countries worldwide.
Net revenue in the third quarter decreased 14% year-over-year to $3.8 billion, primarily due to 36% decline in cross-border volume. However, gross dollar volume increased 1% and purchase volume was up 2%, returning to positive territory. The company’s customers had issued 2.7 billion Mastercard and Maestro-branded cards till the end of the quarter. EPS for the quarter came in $1.51, declining 27% year-over-year.
MA is witnessing encouraging progress in the trajectory of domestic spending. Consequently, analysts expect EPS to rise by 29.9% next year. MA closed yesterday’s trading session at $335.45, gaining 12.3% year-to-date. The stock is presently trading just 8.7% below its 52-week high of $367.25.
MA’s POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with an “A” for Trade Grade, and a “B” for Buy & Hold Garde, Peer Grade, and Industry Rank. Among the 46 stocks in the Consumer Financial Services industry, it’s ranked #7.
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.
Ahead of the holiday season, PYPL has teamed up with American Express (AXP) to introduce Amex Send and Split service which enables customers to split purchases and manage their expenses on PayPal and Venmo. PYPL also rolled out a QR code touchless payment system, earlier this year into its point-of-sale systems and e-commerce rewards to boast digital payments amid the pandemic.
PYPL added more than 15.2 million new accounts in the third quarter of 2020 and 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. Revenue increased 25% year-over-year to $5.46 billion. EPS for the quarter came in at $0.86, rising 121% year-over-year.
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 quarter EPS to grow 15.1% year-over-year. The stock closed yesterday’s trading session at $191.94, gaining 77.4% year-to-date. It is presently trading 11% below its 52-week high of $215.83.
It’s no surprise that PYPL is rated “Buy” in our POWR Ratings system. It also has a “B” for Trade Grade, Buy & Hold Grade, and Industry Rank. It is ranked #8 out of 46 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. A recent rumor indicates that SQ could be preparing to get into tax preparation services.
In the 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 has been efficiently leveraging relentless innovation allowing the company to accelerate growth even amid a challenging economic backdrop. The market expects EPS to rise by 1,100% next quarter. SQ closed Friday’s trading session at $179.16, gained more than 186% year-to-date. The stock has recently hit its all-time high of $201.33 and is presently trading 11% below it.
SQ is rated “Buy” in our POWR Ratings system, consistent with its strong momentum. It holds an “A” for Trade Grade, and a “B” in Buy & Hold Grade, Peer Grade, and Industry Rank. It is ranked #23 out of 235 stocks in the Financial Services (Enterprise) industry.
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SQ shares were trading at $188.24 per share on Tuesday afternoon, up $9.08 (+5.07%). Year-to-date, SQ has gained 200.90%, versus a 13.88% 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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