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Delta Variant Pulls Back Payment Stocks: Should You Worry?

·4 min read

Stock markets were in red as pessimism took over due to COVID-19 Delta variant spike in cases across many parts of the United States.

After reports came out that coronavirus cases are rising in all 50 states and people will have to go behind the masks, stock markets dipped. In the last trading day, The Dow Jones Industrial Average closed down 2.1%. The S&P 500 lost 1.6% and the technology-heavy Nasdaq composite declined 1.1%.

Rising COVID-19 Cases

The United States reported more than 39,000 fresh coronavirus cases on Friday with above 29,000 cases as daily seven-day moving average, according to the Centers for Disease Control and Prevention (CDC).

The new COVID-19 cases are not surprising as the another wave was more or less anticipated. There was widespread optimism as pandemic fears started receding with successful vaccination drive. Growth was being revived with the reopening of economies, resumption of business activities and people venturing out of their houses.

If the pandemic continues to surge, economic growth might slow down. Almost all sectors started recovering but there is a cloud of uncertainty now. The most vulnerable area is travel and tourism.

The travel industry was just coming back to normalcy, but now recovery might limp. The United States recently issued a "Do Not Travel" advisory for the UK as the latter is witnessing a spurt in coronavirus cases by more than 50,000 a day.

The US administration and airline officials do not expect the restrictions on UK travelers to be lifted until August at the earliest and warn the same to be extended. Not surprisingly, airline stocks like American Airlines fell 4.14% and the United Airlines shed 5.54%.

Payment Stocks Down

Another group that suffered a setback with fortunes tied to the travel and entertainment space comprises the payment processing stocks. Bulk of these companies' revenues including the likes of Visa Inc. V, Mastercard Inc. MA, American Express Co. AXP and Discover Financial Services DFS comes from spending on Travel & Entertainment. Shares of these players were down 3.11%, 5.6%, 4.24% and 3.08%, respectively.

Last year, lower consumer spending and brakes on T&E affected earnings at each of the companies. Though the shift to online shopping and the boom in e-commerce came to their rescue, shopping was limited mostly to non-discretionary products amid uncertainty on the shoppers’ own financial stability. Earnings were majorly hurt by cross-border revenues, which remained stressed under a curtailed T&E activity. Cross-border business carries higher margins for these companies.

These industry players were hoping for a recovery in 2021 and much to their delight, the economy was truly on the mend. They were looking forward to this summer’s T&E spending which was trending on quite well. Many Americans started stepping out this year, evident from the bookings for summer vacations that bettered last year’s tally. The companies were hoping to see an improvement in cross-border revenues.

Amid a resurgence in travel, American Express even refurbished its Platinum card, which is a premium travel card, earlier during the month. It added many benefits and rewards for its customers to entice them to use the card while making payments for travel.

If the Delta strain continues spreading the infection unabated, then this year also will be a dampener for these payment processors, who get a percentage of the total transaction value each time their branded card is swiped.

Should You Worry?

This downtrend, however, should not be much of a concern for long-term investors in the payments space. These companies boast businesses with a strong global presence. Their brand name, security, reliability and flexibility retain loyalty of their existing customers. These stocks eye a decent growth trajectory ahead with the soaring e-commerce trend, the rollout of 5G technology and the gradual uptake of digital and cryptocurrencies.

Visa has even allowed the use of the cryptocurrency USD Coin to settle transactions on its payment network. In the first six months of the year, spending on crypto-linked cards on the company’s network exceeded $1 billion. Mastercard too adopted measures to broaden the acceptance of cryptocurrencies via its new set of cards.

With payment landscape, undergoing digital transformation these companies are implementing strategies to stay ahead in the race for innovation. This should help them to grow for the foreseeable future.

Among the payments stocks mentioned above, Visa carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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Mastercard Incorporated (MA) : Free Stock Analysis Report
Visa Inc. (V) : Free Stock Analysis Report
Discover Financial Services (DFS) : Free Stock Analysis Report
American Express Company (AXP) : Free Stock Analysis Report
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