In the grip of coronavirus fears, the stock markets have so far been spiraling down, Also, there are growing concerns that the outbreak could further disrupt global economic growth.
As the disease started spreading rampantly in February causing worldwide cancellation in travels, the payment stocks came under pressure.
Payment companies, such as Visa Inc. V and Mastercard Incorporated MA with solid international presence and a vast payment network already felt the heat. Both players derive nearly one-third of their revenues from cross-border transactions that took a massive hit after people increasingly suspended their travel plans to stay safe from the COVID 19.
Consequently, stocks of payment entities, namely Visa, Mastercard, American Express Co. AXP, all have fallen 6%, 5.7% and 8.8% in the month so far while the Zacks Financial Transcation Services has slipped 4.1%.
Near-Term Guidance Cut
In fact, Mastercard, one of the leading players in the payment markets estimated revenue growth for the first quarter of 2020 to be 9-10% year over year on constant currency basis (200-300 basis points lower than the previous projection of year-over-year growth in low-double digits. If the impact is limited to the first quarter, management believes that net revenue year-over-year growth for the current year will be at the lower end of the view in low-teens at cc).
Management at Visa on its first-quarter fiscal 2020 earnings call stated that cross-border volumes in the last two weeks of January were negatively impacted by the shift in the Chinese New Year with potentially some initial effects of the coronavirus outbreak. International transaction revenues make up nearly 34% of Visa’s net revenues.
Nevertheless, the drag from the coronavirus appears to be a temporary crash. The favorable economic indicators in the United States point to strong consumer spending, which in turn, should support transaction processing growth.
Economic Indicators Support Spending
The Conference Board Consumer Confidence Index, which measures consumer’s attitude to current and short-term economic conditions (in next six months), rallied in February, following a rise in January. The Index now stands at 130.7, up from 130.4 in January.
The surge in the index shows that growth trend witnessed recently will continue. This should lead to higher consumer spending, which is surely a welcome sign for payment and network, which are the end-beneficiaries of the rising consumer spending as well as confidence.
Also, retail sales in the United States inched up 0.3% sequentially in January, slightly higher than a downwardly revised 0.2% uptick in December. Meanwhile, the same was in line with market expectations. Sales rose 4.4% year over year in the month.
An increase in sales and a bullish consumer sentiment bode well for the aforementioned payment stocks as now consumers prefer alternative new-age modes of payment given their ease, efficient, flexibility, etc. compared with the cash-payment methods. This broad-based shift to noncash payments presents a solid growth opportunity for all payment companies.
As technology evolves from wired to wireless solutions, driven by technology developments like the expansion of mobile technology and the emergence of 5G networks, there surfaces a significant scope for frequency in digital payment. These companies thus are poised for growth in the long haul.
Thus, we see that the economic downturn induced by the pandemic should be viewed as a temporary glitch and there is enough power in these stocks to bounce back once the situation resumes normalcy.
In fact, the recent decline in the stock prices of these companies should be considered a buying opportunity for investors.
American Express, Mastercard and Visa carry a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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