Not even a potential economic downturn is stopping U.S. consumers and savvy millennials from shifting more to phone-assisted payments in the coming year.
There is a general consensus on Wall Street that payment stocks can weather a slowdown. Even Goldman Sachs analysts, who are taking a more defensive posture on stock selection within payments and IT services, expect lower unemployment and wage increases to drive growth in consumer spending.
Payment networks have outperformed during periods of slow or declining consumer spending in the past and muted revenue growth is likely if retail sales slow, but results would be somewhat better than during the slump of 2008, Goldman analyst James Schneider wrote in a note. A slowdown would have a bigger impact on Mastercard Inc., the world’s second-largest payments network, than Visa Inc., according to the analyst.
“We remain constructive on the outlook for U.S. consumer spending in 2019 and are using 5 percent retail sales growth (in line with preliminary 2018 results) as a baseline for our 2019 estimates,” Schneider wrote. “Lower gas prices and volatility in emerging markets are likely to pose headwinds to growth on the margin for our companies with global exposure.”
Consumers around the world are shifting to electronic payments for faster and more convenient transactions, a trend that’s disrupting banks. Two of the biggest U.S. banks, Goldman Sachs Group Inc. and Wells Fargo & Co., said earlier this year they were looking into consumer finance for a share of the $183 billion in fees and interest tied to credit-card lending.
The Chinese are leading the adoption of mobile payments for consumers -- China’s Alipay, for example, handled 256,000 transactions per second on its busiest day in 2017, more than 10 times the capacity of Visa’s network. Schneider upgraded Fiserv Inc. and Fidelity National Information Services Inc. to “reflect a preference for companies with less macroeconomic revenue sensitivity, which also have the ability to better protect earnings in a downturn.”
MoffettNathanson analyst Lisa Ellis is banking on cyclical and secular factors to fuel the ‘‘rising tide of cash-to-card displacement,’’ including strong U.S. macro performance, e-commerce growth, cash displacement in developing markets, increased acceptance through mobile point-of-sale systems and growth in prepaid cards.
‘‘The power of secular growth in global digital payment volumes underpins our bullish theses on what we dub the ‘MVP’s of Payments – ‘M’astercard, ‘V’isa, and ‘P’ayPal," Ellis wrote in a note.
These digital payment ‘MVPs’ are also Ellis’ most recession-resilient payments stocks, while International Business Machines Corp., DXC Technology Co., Accenture and Cognizant are viewed as the most exposed IT services stocks. Digital payments penetration in particular, ‘‘provided some resiliency to Visa and Mastercard during the last recession,’’ Ellis wrote.
The S&P 500 Data Processing & Outsourced Services Index, which includes the payment processors, is ahead almost 11 percent in 2018. Meanwhile, the S&P 500 Financials Index (S5FINL) has lost about 17 percent, more than twice the 7.7 percent slide in the S&P 500. Mastercard has climbed 21 percent in 2018 while Visa added 13 percent and PayPal Inc. gained 12 percent.