Fiserv - >>> How can the companies that help us pay for goods survive a coronavirus shutdown?
MarketWatch
April 14, 2020
By Emily Bary
https://www.marketwatch.com/story/how-can-the-companies-that-help-us-pay-for-goods-survive-a-coronavirus-shutdown-2020-04-14?siteid=bigcharts&dist=bigcharts
The payments industry in the age of COVID-19: PayPal and Square look for new opportunities, while Visa and Mastercard look to survive a new kind of economic downturn
As the COVID-19 outbreak curtails consumer spending, some younger payment-processing companies are getting creative, while the stalwarts are betting their resilient business models can withstand the latest economic downturn.
PayPal Holdings Inc. PYPL, +3.26% and Square Inc. SQ, +6.57% are among a handful of financial-technology companies that have been approved to distribute small-business loans through their platforms as part of the Paycheck Protection Program, as well as to help disburse stimulus payments to individuals.
Despite new opportunities like those, there are still concerns about how the payments industry will fare as the COVID-19 crisis shakes the global economy. Industry giants Visa Inc. V, +4.38% and Mastercard Inc. MA, +5.35% have survived many recessions, but there’s little historical parallel for an event that makes wide swaths of the population afraid to leave their homes. The credit-card networks will be relying on their high margins and enhanced e-commerce exposure to carry them through.
Business in the age of COVID-19: Read how other large companies will be affected by the coronavirus
Though shoppers might be eager to stock up on canned goods, toilet paper and other essentials during the crisis, that can’t make up for the many areas where spending has all but dried up. Retail store closures mean that fewer people are buying discretionary items, restaurants can only do so much business by selling takeout to a wary public, and tourism is virtually nonexistent.
Because payments companies touch so many aspects of the economy, it’s unclear when their businesses could return to normal. No one knows how long or how deep a coronavirus-driven recession would last, which could pressure spending until consumers feel more certain about the economic landscape. Some areas, like travel, may be especially stubborn until a vaccine becomes widely available.
Of course, e-commerce is far more prevalent now than it was a decade ago, giving payment providers a bit of a cushion even as surging unemployment and general unease about the economy prove tougher hurdles to spending. Analysts say PayPal, which conducts nearly all of its business online, could withstand COVID-19 better than most.
While the major players are likely to feel the sting now, a heightened awareness of germ spread could help ultimately accelerate plans by Visa and Mastercard to grow adoption of contactless payments in the U.S.
How the stocks are reacting
Mastercard shares dropped 19% in the first quarter, while Visa shares fell 14%, PayPal shares decreased 11%, and Square shares declined 16%. The S&P 500 SPX, +2.67% was off 20% in the first quarter, while the Dow Jones Industrial Average DJIA, +2.99%, which counts Visa as a component, fell 23%.
Analysts are overwhelmingly bullish on Visa, Mastercard, and PayPal shares, and while Square remains the most controversial of the four, sentiment has become more bullish in recent months as the stock pulled back. Of the 40 analysts who cover the stock, 19 rate it a buy as of April 14, while 19 rate it a hold and two rate it a sell. There were 18 buy ratings, 16 hold ratings, and six sell ratings in late December.
The companies and their numbers
Visa: The card giant has seen “a rapid deterioration of cross-border travel-related spending,” according to a March 30 filing in which the company issued its second profit warning since Visa’s late-January earnings report. Visa told investors in this latest update to brace for mid-single-digit March-quarter revenue growth, below its initial forecast of low double-digit growth. Areas that had seen the greatest negative impacts over the course of March included travel, restaurants, entertainment and fuel.
Revenue and earnings estimates have fallen for Visa’s fiscal second quarter, which ended in March. Analysts tracked by FactSet modeled $5.79 billion in revenue and $1.36 a share in earnings as of late March, down from estimates of $6.11 billion and $1.46 a share, respectively, as of late December.
For the full fiscal year ending in September, the consensus forecast called for $23.41 billion in revenue and $5.57 a share in earnings as of late March, below late-December forecasts of $25.43 billion and $6.21 a share, respectively.
Mastercard: While the company argued back in January that its e-commerce business provided a “natural hedge” on the coronavirus outbreak in China, Mastercard has since acknowledged more risks. The company has issued two revenue warnings since its January earnings report, with the latest one on March 24 calling for low- to mid-single-digit net revenue growth in the first quarter. That’s down from an initial forecast of low-teens growth. While it faces a challenging consumer-spending landscape, Mastercard also highlighted weakness in business spending, pressuring an emerging-growth area for the company as it tries to capture more commercial volume.
Analysts surveyed by FactSet modeled $4.08 billion in first-quarter revenue as of late March, down from an estimate of $4.39 billion at the end of December. Earnings estimates declined to $1.78 a share as of the end of March from $2.02 a share at the end of December.
For the full year, analysts modeled $17.42 billion in revenue as of late March, down from their December estimate of $19.17 billion. They were looking for $7.83 a share in full-year earnings, below their December forecast of $9.05 a share.
PayPal: Unlike Visa, Mastercard, and Square, the company generates nearly all of its revenue from online sales, which was the focus of its Feb. 27 business update. At that point, the company disclosed in a press release that its “business trends remain strong” though cross-border e-commerce had been negatively impacted by the outbreak. PayPal told investors to expect revenue “toward the lower end” of its previously issued forecast of $4.78 billion to $4.84 billion. The company announced April 10 that it was approved to offer access to Paycheck Protection Program loans through the Small Business Administration.
The FactSet consensus reflects that new disclosure, as analysts modeled $4.79 billion in first-quarter revenue as of the end of March, below the $4.84 billion they were projecting as of late December. They also called for 77 cents in adjusted earnings per share, below their late-December projection of 82 cents.
For the full year, analysts expected $20.61 billion in revenue and $3.39 a share in earnings as of late March, below the $20.74 billion and $3.49 a share, respectively, that they had been calling for at the end of 2019.
Square: The company, which has heavy exposure to small- and medium-sized businesses, disclosed on a March 24 investor call that payment volume during the prior 10 days was off 25% from a year earlier, with greater declines in areas that were early to issue shelter-in-place orders. The company also lowered its first-quarter outlook and pulled its full-year forecast. It has been offering tools to sellers that enable them to do business online and offer curbside pickup. Square Capital Lead Jackie Reses tweeted April 13 that the company has been approved for Paycheck Protection Program lending through the SBA.
While revenue estimates for Square’s first quarter have actually increased since December, rising to $1.3 billion from $1.21 billion, they’ve fallen for the second quarter and the full year. Analysts modeled $5.35 billion in full-year revenue as of March 31, down from their estimate of $5.68 billion in late December.
Analysts predicted 13 cents a share in first-quarter adjusted EPS as of March 31, below the 16 cents a share they were calling for in late December. Full-year estimates fell to 64 cents from 96 cents.
Other payments companies to watch: Shopify Inc. SHOP, +12.15% , Global Payments Inc. GPN, +9.84% , Fiserv Inc. FISV, +5.11% and Fidelity National Information Services Inc. FIS, +4.04% .
What analysts are saying
• “A recession coincident with the coronavirus-related social distancing measures could be meaningfully worse for Visa and Mastercard than the [global financial crisis] (because of sizable impact on travel & discretionary spend).” — Bernstein analyst Harshita Rawat, who rates both stocks at outperform with a $190 price target for Visa and a $300 price target for Mastercard.
• “Amid the severe business disruptions caused by the coronavirus pandemic, investors have become highly sensitive to the consequences of companies across various industries accepting government support… Importantly, we do not believe Visa, Mastercard, or PayPal will require government bailouts and do not expect them to face future limitations on share repurchases as a result.” — Instinet analyst Bill Carcache, who has buy ratings on all three stocks.
• “It seems like a definite messaging opportunity for some of the large wallet providers as well as the big card issuers and payments companies like Visa to promote the sanitary aspects of contactless payments,” — Jordan McKee, the research director at S&P Global Market Intelligence’s 451 Research, told MarketWatch.
• “We believe PayPal will be one of the lesser affected companies in our universe because of the heavy weighting of online payment transactions, and we believe PayPal will grow revenue through this period.” — William Blair analyst Robert Napoli, who rates the shares at outperform.
• “Square’s unique and now challenged exposure will make the stock a proxy for some of the most vulnerable businesses, where federal response will be crucial.” — Citi analyst Peter Christiansen, who downgraded Square’s stock to neutral from buy on March 18 while cutting his target price to $50 from $99.
• “We think PayPal and Square are likely to earn the majority of lender origination fees” — Barclays analyst Ramsey El-Assal, who said that lenders will receive 5% from the SBA for loans below $350,000, which he thinks will represent the bulk of PayPal’s and Square’s lending. He expects the program fees to “contribute high margins.”
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