Whether you’re looking to make a losing deal or play it safe, analysts see potential in the payments industry as we head into the new year.
With a potential recession on many investors’ minds, it is worth noting that during the last great recession, in 2009, less than a third of the S&P 500 SPX,
components managed to increase their revenue, according to Dow Jones Market Data, but two of them were Visa Inc. V,
and Mastercard Inc. MA,
Those stocks remain “big names defensively,” SVB analyst MoffettNathanson Lisa Ellis said during a Barron’s Live event on Wednesday.
Visa and Mastercard didn’t just boost revenue during the worst financial crisis. The companies also expanded volumes and increased earnings, Ellis noted, buoyed by the “underlying long-term secular trend of cash-to-paper conversion that really drives the engine of those businesses” and continues today.
Don’t Miss: The Best Pay Share Bets in 2023 on Barron’s Live
While companies face some pressure from a strong US dollar, they remain “big plays during a macro slowdown” as they are “effectively beneficiaries of inflation, because their prices are tied to the dollar value of payments,” he said.
Choosing between the two is like “choosing between your kids,” Ellis said, though he has a slight preference for Visa, which he sees trading at a “larger discount to Mastercard than normal” as the market undervalues the business. company’s Europe.
Mizuho’s Dan Dolev, who also spoke at Wednesday’s event, named Fiserv Inc. FISV,
one of his favorite defensive plays for 2023. The merchant-buyer company’s shares have held up better than peers Fidelity National Information Services Inc. FIS,
and Global Payments Inc. GPN,
this year, falling less than 3% so far in 2022 compared to 25% declines in the other two.
These three merchant-buyers are known as the headlines in the deal, and all three announced major mergers in 2019. the likes of Block Inc.’s SQ,
Square and Toast Inc. TOST,
“They’re huge in scale because they have millions of merchants and they also have a big, shiny, white store [point of sale]that everyone likes to have,” she said.
Dolev added that he is not “all that concerned” about Fiserv shares trading at a premium to peers, as “execution is key and people will pay for growth and high-level fundamentals.”
One question that arises in 2023 within the trader buyer category is whether FIS can roll over. The company has a new CEO, a new chairman of the board, and the involvement of activists and investors. Management earlier this month announced a review of its business under that leadership.
Read more: FIS to conduct ‘comprehensive assessment’ as new CEO takes ‘in-depth look’ at business
“There’s definitely hope,” said Dolev, who rates the stock as a buy, but “I think it calls for a big raise.”
Ellis added that “many investors are peering under every rock, looking for a silver bullet” with FIS, while she thinks there is “a lot of blocking and contrasting that needs to happen” as new management tries to get costs and liquidity flow under control.
Two other controversial names in payments are PayPal Holdings Inc. PYPL,
and Block, each down more than 60% in 2022.
Ellis and Dolev are both bullish on PayPal’s stock, though Ellis said the position is based more on the stock’s valuation than the prospects for his business.
“We’re still over-rating on them primarily due to valuation, but it’s very transparent towards the bottom of our list right now and we have kind of a cautionary sign,” mostly “for competitive reasons,” he noted. The pandemic has led to increased adoption of contactless payments such as Apple Inc.’s AAPL,
Apple Pay, which has translated into better traction for that online service as well.
Dolev noted that two potential catalysts could be an eventual change to the CEO and the possibility that European Union regulations force open access to the near-field communications chip on iPhones so Venmo users can tap to pay. with the service.
See Also: Mastercard, Fiserv & More: These Payment Securities Being Dubbed the Favorites for 2023
Block is a way to interpret the most dejected names, according to Ellis. It sees room for 70% earnings before interest, taxes, depreciation and amortization (EBITDA) growth as the company cuts costs and works beyond integrating the buy-now-pay-after Afterpay business.
“Block is a relatively low-margin business,” he said, with adjusted margins close to 20%. “So it doesn’t take much ‘change on the operating expense side’ to see tremendous growth on the Ebitda side.”
Dolev was admittedly more negative on the name, saying that despite the potential margin, Chief Executive Officer Jack Dorsey seems absent and it may be more difficult to steer synergies between different parts of Block’s business than it might appear on paper.
Sees an opportunity in SoFi Technologies Inc. SOFI,
70% off so far in 2022.
“SoFi is a regulated bank,” valued on a price-to-book basis, and “the downside risk is extremely minimal because it’s trading kind of bare bones right now,” he said.
According to Dolev, the stock was weighed down by negative sentiment around student loans, which is “a bit behind us at this point.” Also, “mortgages will come back at some point.”
“There are just more opportunities than risks,” Dolev added, making SoFi his “favorite name” among lenders.
Among 2022 extreme laggards, Ellis is bullish on Coinbase Global Inc. COIN,
a controversial name that has seen nearly 90% of its value evaporate this year as competitive and regulatory pressures as well as high-profile collapses of rival platforms like FTX have hurt industry sentiment.
Read: Coinbase Faces “Increased Uncertainty and Risk” Due to FTX Fallout, Says Analyst
“This, in my view, is a pretty unique investment asset, but you have to have a multi-year time frame,” Ellis said. Right now, Coinbase’s business is very retail-oriented, but the company has the potential to be “more of an infrastructure provider to the cryptocurrency economy” with opportunities in areas like clearing, settlement, and cross-border trade.