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Payment Processing Stocks Gain on Coronavirus Vaccine News

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The announcement from Pfizer Inc.’s (PFE - Free Report) management about a near-successful vaccine (with effectiveness rating of 90%) against the COVID-19 buoyed investors’ optimism across the stock markets.

The news about the vaccine was accepted under an impression that COVID-19 can somewhat be tackled. It drove the shares of sector participants that belong to travel and entertainment space besides energy, financials, et al.

One industry that took the news in its stride is the payments processing one as the vaccine if found effective will prompt people to resume travel, taking national and international flights frequently. This, in turn, will positively impact the industry’s cross-border transactions.

Stocks of Visa, Mastercard, Discover Financial Services and American Express gained 7.2%, 9.8%,12.2% and 21.4%, respectively, on Monday's trading.

Payment stocks, such as Visa Inc. (V - Free Report) , Mastercard Inc. (MA - Free Report) , American Express Co. (AXP - Free Report) and Discover Financial Services (DFS - Free Report) took a hammering this year as demand for hotels and airfares dwindled due to COVID-19 lockdown orders, which confined the prospective travelers to their homes.

Consumers to date avoided travel and spending overseas, thereby limiting transactions that are most lucrative on the firms’ networks. Companies like Visa and Mastercard earn a fee from every transaction that runs on their network while American Express too recognizes a significant portion of its revenues from annual fee receipts. Lack of cross-border payments is especially painful as those card swipes yield higher margins and end up being more rewarding.

Cross-border volume dropped 48% in the quarter ended Sep 30 at Mastercard and 29% for Visa. American Express’ profit margin was down 40% in the just reported quarter due to a 69% decline in travel and entertainment spending.

Nevertheless, payment companies spending on their cards in the United States recover faster than other regions around the world. That’s partly due to the stimulus and additional unemployment insurance offered to consumers.

The payment stocks also gained from an increase in online shopping as shoppers avoided physical interactions. These stocks are also benefiting from holiday shopping, which already started as the largest online retailers made major pushes to capture more of that spending this year.

Though people are taking road trips and spending on holidays, these players are waiting impatiently for the international travel to pick up the pace. Major credit card companies considered this slowdown in international travel as a key reason for the double-digit drops in profits during the  quarter ended Sep 30, 2020. Per Visa, Mastercard and American Express, cross-border transactions usually  tend to be more lucrative than the domestic payments. However, this time, due to the continued economic turbulence, border restrictions and delayed payments, cross-border volume was badly hit.

The payment industry is poised for strong growth owing to a rapid shift from cash to digital modes of payment, which is the mostly preferred by the next-gen consumers new-age generations. Also, the coronavirus episode made the older generation adopt the digital method, given that this is so very flexible, easy and secure. Thus, the transition to digital seems almost permanent.

Even after the vaccine finds its way into our lives, some of the changes brought in by the pandemic are there to stay, and payment via digital mode is one such phenomenon.

Therefore, we find the payment processing stocks in a win-win situation.
Among the stocks mentioned above, Discover Financial Services carries a Zacks Rank #3 (Hold), currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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