As e-commerce and mobile payments rise, the use of credit cards and digital wallet platforms continues to surge. This makes sense, as other traditional forms of payment, such as cash and checks, are not even an option for most online and in-app purchases. While there is no exact definition of what belongs in the payments industry, it is generally considered to consist of the credit card networks, payment processors, digital wallets, and other companies that facilitate the movement of money on virtual platforms.
The ETFMG Mobile Payments ETF (NYSEMKT: IPAY) is one of the only ETFs dedicated to the industry. Not surprisingly, then, given the secular forces acting as tailwinds listed above, it has handily beaten the market, as measured by the S&P 500 index, since its inception. Since the beginning of the year, the ETF is up 15%, compared with the S&P 500's 5.7% gain, and looking through the fund's portfolio, one finds many longtime winners, such as Square and Mastercard.
While payments stocks have been hot the past few years, the sector's torrid pace has left behind PagSeguro, Discover Financial, and NCR. Image source: Getty Images.
Yet not all its holdings are performing well this year. After screening its positions for companies trading on U.S.-based stock exchanges and with market caps greater than $1 billion, here are the payments industry's three worst performing stocks of 2018 (so far): PagSeguro Digital Ltd (NYSE: PAGS), Discover Financial Services (NYSE: DFS), and NCR Corporation (NYSE: NCR). Let's take a closer look at each of these companies and see why they have been struggling so much this year.
Discover Financial: Down 2%
Discover Financial is the smallest of the four major domestic credit card networks. It is fairly unique in that it acts as both a lender and payments network, putting it in a class with only American Express (NYSE: AXP) as company. The company's stock price has struggled this year, even though it has reported mostly good quarterly results thus far.
In Discover's second quarter, net revenue rose to $2.6 billion, an 8% increase year over year, and diluted earnings per share (EPS) grew to $1.91, a 36% increase year over year. Its total loan portfolio grew 9% to $84.8 billion, with the company showing positive growth in all three of its major loan portfolios of credit card loans, student loans, and personal loans. While the company's loan loss provisions also grew 16% year over year, this actually marks a slowdown in the money Discover is setting aside for loan losses.
Discover's management remains shareholder-friendly. Recently a new $1.85 billion share repurchase plan was announced and the dividend was raised 14% to $0.40, giving the shares a decent 2.2% dividend yield. Given the company's growth, shares seem more than fairly priced and sport an attractive P/E ratio of just 10.9.
PagSeguro Digital: Down 9%
After going public in January, PagSeguro Digital rocketed up almost 30% in the next few months, before falling below its IPO price, which is where it sits today. PagSeguro is both a digital wallet-type platform for consumers and a payments processing company for small businesses in its native Brazil. As a digital payments platform, it allows Brazilian consumers to deposit cash and then use their accounts to pay for goods online and at the point of sale (POS). As a payments processor, it enables retailers to accept card and mobile payments, a capability that many merchants previously lacked in that country.
When the company reported its first-quarter results, the numbers were a mixed bag. While revenue and earnings skyrocketed $443 million reais, a 132% increase year over year, so did expenses, which were up 108%. When management said in the quarter's conference call that it would be cutting merchant prices in response to increased competition, shares began their precipitous fall. The stock price dropped further in June, when the company announced a secondary offering -- usually a red flag when done so close to an IPO -- and that PagSeguro's parent company, Universo Online, would be selling a good chunk of its stake in the company.
NCR: Down 21%
NCR has come a long way from its humble origins as a cash register manufacturer when the company was still known as National Cash Register. Today the company offers a variety of omnichannel commerce solutions for businesses and financial institutions in three different operating segments: software solutions, hardware products, and services.
Its software division is responsible for several industry-specific point-of-sale solutions and NCR Silver, a cloud-based POS designed for the needs of small businesses. In the company's second quarter, software revenue grew to $470 million, a modest 1% increase year over year.
In its hardware segment, the company specializes in providing financial institutions with self-serve products, including ATMs and interactive kiosks. In Q2, revenue declined 16% year over year to $457 million in this department.
NCR's services segment, now its largest by sales, helps businesses assess their omnichannel needs, implement a strategy, install its equipment, and then offer maintenance and support. Sales in this division increased 4% to $610 million.
Overall, the company's second quarter, marked by anemic growth and reduced guidance, was probably a familiar story to long-term shareholders. The stock price has now been basically stagnant for the past three years and, over the past five, shares have dropped more than 20%.
Keep this in mind
Before making an investment, it's important to look at a company's fundamentals and not just its recent stock price actions. Sometimes a company's share price falls because of declining business conditions, stiff competition, and poor performance, as seems to be the case for shares of PagSeguro and NCR. Other times, the market overreacts to news, making a dip in share price a buying opportunity for alert investors, and I believe this is the case for Discover. Most important, however, remember that your own due diligence before making an investment covers far more than looking at a company's stock chart of the past few months.
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Matthew Cochrane owns shares of Mastercard and Square. The Motley Fool owns shares of and recommends Mastercard and Square. The Motley Fool has the following options: short September 2018 $80 calls on Square. The Motley Fool recommends NCR. The Motley Fool has a disclosure policy.