Whether you’re looking to scoop up some beaten-down bargains or trying to play it safe, analysts see potential in the payments sector heading into the new year.
With a potential recession on many investors’ minds, it’s worth noting that during the last big downturn, in 2009, fewer than a third of S&P 500
components managed to boost their revenue, according to Dow Jones Market Data, but two of them were Visa Inc.
and Mastercard Inc.
Those stocks remain “great defensive names,” SVB MoffettNathanson analyst Lisa Ellis said during a Barron’s Live event on Wednesday.
Visa and Mastercard didn’t just increase revenue during the worst of the financial crisis. The companies also expanded volumes and grew earnings, Ellis noted, buoyed by the “long-term, underlying secular trend of cash-to-card conversion that really drives the engine of those businesses” and continues to this day.
While the companies face some pressure from a strong U.S. dollar, they remain “great plays during a macro slowdown” as they’re “actually beneficiaries of inflation, because their pricing is tied to the dollar value of payments,” she said.
Picking between the two is like “choosing between your children,” Ellis said, though she has a slight preference for Visa, which she sees trading at a “wider discount to Mastercard than normal” as the market underappreciates the company’s European business.
Mizuho’s Dan Dolev, who spoke at Wednesday’s event as well, named Fiserv Inc.
one of his favorite defensive plays for 2023. The merchant-acquirer company’s stock has held up better than peers Fidelity National Information Services Inc.
and Global Payments Inc.
this year, falling less than 3% so far in 2022 versus declines upward of 25% for the other two.
Those three merchant acquirers are known as the deal stocks, with all three announcing big mergers in 2019. Fiserv’s acquisition of First Data has played out the best, according to Dolev, as it came with the Clover point-of-sale business that competes with the likes of Block Inc.’s
Square and Toast Inc.
“They’ve got massive breadth because they have millions of merchants and they also have a great, shiny, white POS [point of sale], which everyone likes to have,” he said.
Dolev added that he’s “not as worried” about the fact that Fiserv shares trade at a premium to peers, since “execution is key and people will pay for top-line growth and fundamentals.”
One question heading into 2023 within the merchant-acquiring category is whether FIS can turn itself around. The company has a new CEO, a new board chairman and activist-investor involvement. Management earlier this month announced a review of its business under that leadership.
“There’s definitely hope,” said Dolev, who rates the stock a buy, but “I do think it requires a big lift.”
Ellis added that “a lot of investors are peeking under every rock, looking for a silver bullet” with FIS, whereas she thinks there’s “a lot of just blocking and tackling that needs to happen” as the new management looks to get costs and cash flow under control.
Two other controversial names in payments are PayPal Holdings Inc.
and Block, each down more than 60% over the course of 2022.
Ellis and Dolev are both bullish on PayPal’s stock, though Ellis said that stance is based more on the stock’s valuation than the outlook for its business.
“We’re still outperform-rated on them because of mostly valuation, but it’s very transparently toward the very bottom of our list right now and we’ve got kind of a caution sign on it,” mainly “for competitive reasons,” she noted. The pandemic drove increased adoption of contactless payments like Apple Inc.’s
Apple Pay, which has translated into better traction for that service online as well.
Dolev had a more tepid outlook for PayPal, though he noted that two potential catalysts could be an eventual change at chief executive and the possibility that European Union regulations would force open access to the near-field-communications chip on iPhones so that Venmo users would be able to tap to pay with the service.
Block is one way to play the more beaten-down names, according to Ellis. She sees room for 70% growth in earnings before interest, taxes, depreciation and amortization (Ebitda) as the company scales back costs and works past the integration of the Afterpay buy-now-pay-later business.
“Block is a relatively lower-margin business,” she said, with adjusted margins near 20%. “So it doesn’t take a lot” of change on the operating-expense side “to see huge growth on the Ebitda side.”
Dolev was admittedly more negative on the name, saying that despite the margin potential, Chief Executive Jack Dorsey seems absent and it could be more difficult to drive synergies between the different parts of Block’s business than it might seem on paper.
He sees opportunity in SoFi Technologies Inc.
off 70% so far in 2022.
“SoFi is a regulated bank,” valued on a price-to-tangible-book basis, and “the downside risk is extremely minimal because it’s trading sort of bare bones right now,” he said.
In Dolev’s view, the stock has been weighed down by negative sentiment on student lending, which is “kind of behind us at this point.” Additionally, “mortgages are going to come back at some point.”
“There’s just more opportunity than risk,” Dolev added, making SoFi his “favorite name” among lenders.
Among extreme 2022 laggards, Ellis is bullish on Coinbase Global Inc.
a controversial name that has seen nearly 90% of its value evaporate this year amid competitive and regulatory pressures as well as the high-profile collapses of rival platforms like FTX that have harmed industry sentiment.
“This, in my view, is a pretty unique investment asset, but you have to have a multiyear time frame,” Ellis said. Right now, Coinbase’s business is very oriented to retail trading, but the company has the potential to be “more of an infrastructure provider to the crypto economy” with opportunities in areas like clearing, settlement and cross-border trade.