Disruption of the payments market got more intense with the recent introduction of Apple’s (AAPL) no-fee credit card that the tech behemoth launched in collaboration with Goldman Sachs. The move is a further validation of the world’s steady march towards a cashless future. In fact, studies show the cash system is already on the verge of collapse in some parts of the world.
The non-cash boom, led by emerging markets that will account for half of cashless transactions globally by 2021, is on track to rack up over US$876 billion in non-cash payment transactions by 2021, growing at more than 12% annually, according to the World Payments Report 2018 (WPR) by Capgemini and BNP Paribas.
As the world pivots towards cashless payments, tech giants and traditional payment processing companies are making a strong push into the burgeoning cashless market trying to open new revenue frontiers and establish their dominance.
A large global presence, a strong uptrend in non-cash payments in developing countries and changing attitudes to cash conspire to position these companies particularly well to benefit from the changing global payment landscape. This may be an opportune time for investors to pay closer attention to the following stocks. They are currently trading above their fair value, but a meaningful pullback could open an attractive entry point.
| Mastercard Inc A | ||
| Ticker: | MA | |
| Current yield: | 0.57% | |
| Forward P/E: | 30.58 | |
| Price: | US$234.32 | |
| Fair value: | US$198 | |
| Value: | 17% Premium | |
| Data as of Mar. 28, 2019 | ||
Mastercard (MA) is the second-largest processor of transactions in the world, with a 26% global market share, 1.8 billion cards in circulation, accepted by more than 40 million merchants worldwide. The company generates revenue by charging fees to its customers (issuers and acquirers) based on the dollar volume of card activity and the number of transactions processed through the network.
Though alternative payment methods and competition could impact revenue, “the global electronic payment pie should expand fast enough to ensure double-digit revenue growth for Mastercard for years to come,” says a Morningstar report.
Mastercard’s wide moat flows from its scale, network effect, brand strength, and consumer trust around data security. “The company and its large competitors are increasingly setting security and technology standards for the entire payment industry,” says Morningstar equity analyst, Brett Horn, who recently raised the stock’s fair value from US$165 to US$198, and forecasted revenue growth to average 13% over the next five years. Few other firms are capable of matching Mastercard’s tech and security standards, he adds.
| American Express Co | ||
| Ticker: | AXP | |
| Current yield: | 1.43% | |
| Forward P/E: | 13.10 | |
| Price: | US$108.74 | |
| Fair value: | US$110 | |
| Value: | 1% Discount | |
| Data as of Mar. 28, 2019 | ||
A global financial institution with operations across 130 countries, American Express (AXP) provides consumers and businesses charge and credit card payment products. AmEx remains a long-term bet and one of the top five holdings (worth US$14.4 billion at the end of 2018) of Berkshire Hathaway, according to the annual shareholder letter released recently by CEO Warren Buffett.
As commercial clients increasingly turn to technology to crimp costs, they create revenue opportunities for AmEx which has entrenched position within many corporate travel departments. “The company has the ability to develop additional software products to deepen these relationships, raise switching costs and create additional revenue streams,” says Morningstar equity analyst, Colin Plunkett, who pegs the stock’s fair value at US$110.
AmEx’s sustainable competitive advantage is built on multiple sources including a vast payment network, switching costs in its commercial business and dominant position in business travel. In particular, the company’s powerful network effect is a dominant moat source, says Plunkett, adding that “Merchants are willing to pay AmEx’s elevated discount rates because cardholders are more frequently bigger spenders.”
| Visa Inc Class A | ||
| Ticker: | V | |
| Current yield: | 0.65% | |
| Forward P/E: | 29.07 | |
| Price: | US$154.39 | |
| Fair value: | US$136 | |
| Value: | 13% Premium | |
| Data as of Mar. 28, 2019 | ||
A giant in the digital payment market, Visa (V) manages payment brands and an electronic global payment network that connects thousands of financial institutions across 200 countries. Visa generates revenue by charging fees to its customers based on both the dollar volume of card activity and the number of transactions processed through the network.
With the rise in consumer spending and digital payments trend, the wide-moat Visa is well positioned to “see healthy growth for years to come as an effective toll booth on global spending,” says a Morningstar report, noting that Visa’s network of 16,800 financial institutions, 44 million merchants, and billions of cards create a “formidable barrier to entry.”
Even tech heavyweights like Apple and Alphabet use existing networks to process digital payments. “Just as Visa set the standard for card payments in the past, it is determining the course of future digital payments,” says Horn, who recently raised the stock’s fair value from US$129 to US$136, and projects 10% annual revenue growth over the next five years, boosted by growing consumer spending and rise of digital transactions.
| PayPal Holdings Inc | ||
| Ticker: | PYPL | |
| Current yield: | - | |
| Forward P/E: | 35.71 | |
| Price: | US$103.58 | |
| Fair value: | US$74 | |
| Value: | 39%% Premium | |
| Data as of Mar. 28, 2019 | ||
Leading digital payment processor, PayPal (PYPL) provides electronic payment solutions to merchants and consumers. It earns revenue through transaction fees. PayPal is known for its digital wallet, which securely and conveniently stores customer account data.
The company has long been a leader in online payments and is particularly well positioned to benefit from the growing trend of mobile payments after acquiring fintech firms Braintree and Paydiant, says Horn, who recently raised the stock’s fair value from US$70 to US$74. “Merchants are clamouring for a frictionless payment experience, and the company’s Braintree division has created exactly that just such an experience for firms like Uber,” he says.
PayPal’s competitive strength -- rooted in its vast network of users and merchants, and payment security --“should be sufficient to allow the company to earn excess returns on capital for an extended time frame,” says Horn, who forecasts business-to-consumer sales over the internet (including mobile) to roughly double by 2023, as digital payments proliferate.
