You know cash is on its last legs when you're able to make cashless payments to buskers and street performers instead of tossing loose change into their hats. While cash as a means of transaction may not be a spent force yet, it is fast getting squeezed out in many parts of the world as digital and contactless payments upend the traditional legal tender.
The media is awash with reports about innovative ways to make digital payments that are effectively creating cashless societies. Global digital payments are expected to reach a record 726 billion transactions by 2020, growing at 11% annually, according to the World Payments Report 2017 (WPR) by Capgemini and BNP Paribas.
Technology and payment processing companies are cashing in on the continuing global pivot toward cashless payments. Some of these businesses are making strategic acquisitions and tie ups to deepen their push into digital payments and unlock new revenue streams. As electronic transactions gain greater acceptance, companies leading the non-cash payment shift -- offering cards, digital and mobile solutions -- continue to profit from the growing trend. With a large global footprint, these companies are particularly well positioned to benefit from the explosive growth of non-cash payments in Asian emerging markets, which are projected by the WPR report to lead the globe with nearly 31% annual growth through 2020.
Investors may want to keep these stocks, which are currently overvalued, on their screen for any meaningful pullbacks that would open attractive entry points.
| Visa Inc. Class A | ||
| Ticker: | V | |
| Current yield: | 0.58% | |
| Forward P/E: | 25.6 | |
| Price: | US$134.21 | |
| Fair value: | US$122 | |
| Value: | 10.0% premium | |
| Data as of June 11, 2018 | ||
King of the hill in the digital payment market, 
Visa (V) operates an electronic global payment network that connects thousands of financial institutions across 200 countries. The firm, which provides authorization, clearing and settlement of electronic payment transactions, generates revenue by charging fees on the dollar volume of card activity and the number of transactions processed through the network.
Visa leads its peers by a considerable margin and accounts for more than half of purchase transaction on global cards, according to the latest Nilson Report.
"As consumer spending around the world grows and digital methods continue to take share from cash, this wide-moat company should continue to flourish for years to come as an effective toll booth on global spending," says a Morningstar equity report. "Visa's competitive position could conceivably be strengthened by the proliferation of digital payment options as technology standards expand in importance."
Given its market dominance, tech giants like Apple (AAPL) and Alphabet (GOOG) have chosen to use Visa's existing networks to process payments. "Even successful competitors like PayPal are choosing to partner with -- rather than attempt to disrupt -- incumbents," says Morningstar equity analyst Jim Sinegal, who recently raised his estimate of the stock's fair value from US$118 to US$122.
Visa and its partners have spent billions of dollars to build their brands, their global acceptance and trust around security of their customers' financial information. "With billions of transactions representing trillions of dollars processed every year, Visa and MasterCard possess unmatched scale [raising] yet another barrier to entry for potential competitors," says Sinegal, who projects annual revenue growth of 10% through 2022.
| American Express Co. | ||
| Ticker: | AXP | |
| Current yield: | 1.36% | |
| Forward P/E: | 14.0 | |
| Price: | US$101.37 | |
| Fair value: | US$112 | |
| Value: | 9.5% discount | |
| Data as of June 11, 2018 | ||
American Express (AXP) provides charge and credit card products, travel services, network services, loans and other products to businesses and individuals.
Despite increased competition for market share, "American Express' competitive advantages -- a reputation for superior service, a network of attractive customers and merchants, and a corporate business with high switching costs -- remain intact," says a Morningstar equity report.
The payment processor's close ties to cardholders and merchants provide a solid base for future growth. "We think there will be a huge opportunity to connect merchants with individual customers based on individual preferences and spending patterns, and that closed-loop networks provide the best opportunity to do this," Sinegal notes.
AmEx, a major holding in Warren Buffett's Berkshire Hathaway (BRK.B), highlighted its efforts in this area by providing 15 million customers with information on local merchants in 2017. "Industry experiments in this area are in the early stages, and successful efforts offer big growth opportunities," says Sinegal, who recently upped the stock's fair value from US$103 To US$112, prompted by an optimistic growth and profitability outlook.
The company has been accelerating its investments in sophisticated technology and appears stronger under its new CEO, he adds.
The firm' corporate business remains an underappreciated crown jewel. "American Express is a dominant force in corporate spending and is leveraging its data into additional services for its business customers, from lending to expense management," Sinegal asserts. "Furthermore, the increasing sophistication of small business will provide a tailwind as these companies begin to utilize various services long used only by larger corporations."
| Mastercard Inc. A | ||
| Ticker: | MA | |
| Current yield: | 0.47% | |
| Forward P/E: | 31.3 | |
| Price: | US$198.74 | |
| Fair value: | US$156 | |
| Value: | 27.4% premium | |
| Data as of June 11, 2018 | ||
The second-largest processor of transactions, Mastercard (MA) has a 26% global market share, with 1.8 billion cards in circulation, accepted by 40 million merchants worldwide. The company functions as a key intermediary between banks around the world, generating a small amount of revenue from every transaction that runs through its vast network and every dollar of payments made using the Mastercard brand.
The company got off to a strong start to 2018, clocking first-quarter revenue of US$3.6 billion, up 31% compared to the same period last year, and reported a 38% jump in profit for the same period.
While the pressure from alternative payment methods and international competition could mount, the global market for electronic payment should expand fast enough to ensure healthy revenue growth for years to come, says a Morningstar equity report.
"The transition to mobile payments will only increase the volume running through Mastercard's network," says the report, implying a healthy top-line growth for years to come.
The proliferation of payment options has served to bolster Mastercard's competitive advantage. "The company and its large competitors are increasingly setting security and technology standards for the entire payment industry," says Sinegal, noting that it's a role few other firms are capable of taking.
Mastercard is also expanding its capabilities in data analytics which can help improve its offerings and those of its institutional customers. Such capabilities are fast becoming a valuable intangible asset for the company, in addition to its robust brand equity and global network, says Sinegal, who recently upped the stock's worth from US$138 to US$156, prompted by higher near-term growth forecasts and lower taxes.
| PayPal Holdings Inc. | ||
| Ticker: | PYPL | |
| Current yield: | - | |
| Forward P/E: | 35.8 | |
| Price: | US$84.14 | |
| Fair value: | US$68 | |
| Value: | 23.7% premium | |
| Data as of June 11, 2018 | ||
A dominant player in digital payments, PayPal (PYPL) provides electronic payment solutions to merchants and consumers. The company, whose digital wallet securely and conveniently stores customer data, earns revenue through transaction fees.
PayPal has long been a leader in online payments and has a head start in the digital transition. "This could provide an advantage as mobile phones become the centre of omnichannel payments," says a Morningstar equity report. "PayPal is well positioned to handle merchant needs in the online, mobile and in-app payment spaces."
The rapid growth of digital payments has proved beneficial as tech companies feeling the edges of the financial-services industry are joining forces with PayPal rather than competing with it. "Partnerships with potential competitors such as Google seem to indicate that the competitive threat posed by technology platforms is not as large as many fear," says Sinegal. "Technology companies are learning that financial services and payments are not easy industries to break into, opening the door to partnerships with PayPal."
As a result, the company is already working with Microsoft's Skype, Google and Apple -- firms that were until recently considered dangerous potential competitors. "PayPal is capable of bridging the wide gap between technology companies and the highly regulated global financial system," says Sinegal, who recently raised the stock's fair value from US$59 to US$68, and projected its revenue to double over the next five years.
Last year, nearly half (46%) of PayPal's revenue came from outside the United States. "Many countries are bypassing the traditional bank-intermediated payment ecosystem for a completely digital experience," says Sinegal. "PayPal's capabilities leave the company well positioned to capitalize on this trend."
