It’s been a tough year for
as payment volumes took a hit with the pandemic. But bullish trends may be building—pointing to gains for the card stocks, along with online payment companies like
according to several Wall Street analysts.
Signs of life in cross-border travel could boost Visa’s (ticker: V) earnings by 10% next year relative to current estimates, according to Mizuho Securities analyst Dan Dolev. Cross-border travel accounted for 7% to 9% of Visa’s total payment volume pre-Covid, he estimates, but it has fallen more than 65% this year as borders closed and travel slumped.
The tide could be turning, though. Checks at 14 online travel and airline websites point to a slight uptick in demand, Dolev says. It’s too early to say how fast cross-border revenue will revive, but it would go a long way to improving the financial performance of both Visa and Mastercard (M) in 2021. Both are expected to report a dip in sales and lower earnings per share in 2020 compared to 2019.
Cross-border transactions are 10 times more profitable than domestic transactions, he estimates.
“This is the first sign of travel coming back,” he said in an interview. “When there’s a vaccine and the skies open up, consensus numbers will start moving higher.” One positive indicator: Visa said recently that when Mexico and Turkey reopened their borders, there was a mini-surge of travel, pointing to pent-up demand when other countries reopen.
While Dolev didn’t raise his earnings estimates, he maintained a Buy rating on Visa and a target of $250 for the stock price. That implies a 23% gains from the shares’ recent level around $203.
PayPal Holdings (PYPL), meanwhile, has benefited mightily from pandemic-related trends such as transactions moving online. The stock is up 79% this year to around $193, but Wolfe Research’s Darrin Peller still views it as undervalued. His target price is $225.
One reason: PayPal just launched a credit card for its Venmo peer-to-peer (P2P) business. That could be a “large monetization opportunity,” Peller writes.
Venmo now has more than 60 million active users. He estimates that the Venmo credit card, which includes 3% cash back on users’ highest-spending categories, could generate $200 a year per user, well above the $10 average for Venmo now. Every 1% of Venmo users who sign up for the card could equate to $150 million in annual revenue for PayPal, he says.
PayPal’s growth has pushed the stock’s price to a rich 51 times estimated 2021 per-share earnings, however. At that valuation, the company will likely have to turn in better-than-expected results and raise its financial forecasts for the stock to keep rising. Any signs of a slowdown could knock its price and multiple down sharply.
Other companies in the payments ecosystem look cheaper, notably the bank processing/merchant acquiring networks:
(FISV), and Fidelity National Information Systems (FIS). All trade around 19 to 23 times estimated 2021 earnings, well below Visa, at 33 times, and Mastercard, at 40 times, not to mention PayPal.
As Barron’s noted in a recent cover story, the processing companies don’t have the growth of the card networks or pure-play online processors. But they have defensive businesses with recurring revenue streams, and they are also seeing positive trends, according to Credit Suisse analyst Timothy Chiodo.
U.S. card payment volumes have stabilized and may be running slightly ahead of expectations, he writes. All three stocks look attractive at current multiples and could benefit from an accelerating decline in cash usage. Business conditions are improving in merchant acquiring (setting up payment systems for retailers). And bank-processing companies are making headway in selling technology to card issuers to upgrade and shift processing capabilities to the cloud.
Chiodo maintained Outperform ratings on all three stocks with a $160 target on Fidelity National, $135 on Fiserv, and $210 on Global Payments.