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Payment Stocks Feel the Heat From Coronavirus Outbreak

Srijita Guha

The payments industry has not been spared from the deadly coronavirus or COVID-19 effect. The rampant coronavirus spread has had a serious impact on the global stock market and is not fading away anytime soon.

The industry has been witnessing solid growth on the back of higher consumer spending, led by a strong labor market, increase in online and e-commerce sales, rise in disposable income, low unemployment rate and an upbeat consumer sentiment. It was well-poised for growth in the first quarter of 2020 until the coronavirus epidemic started acting as a headwind, affecting several countries across the globe, such as the United States, Italy, South Korea, India, Israel, Denmark and Japan, apart from its country of origin, China.

The global pandemic has rocked the payments players with some having also lowered their guidance reeling under its severity. The coronavirus fear has hit the consumer spending hard due to lower travel frequency.


 

Despite this vulnerability, shares of Global Payments Inc. GPN jumped on Tuesday as it faced no negative impact on its Europe or Americas business. The company retained its outlook due to limited exposure to the coronavirus, which is unlike its peers Visa Inc. V and Mastercard Inc. MA as both recently cut down on their respective projections.

A few top players in the industry are, however, bearing the brunt of coronavirus-induced business loss.

Visa, which has a solid international presence and a vast payment network, already felt the heat. Management on its first-quarter fiscal 2020 earnings call stated that cross-border volumes in the last two weeks of January were affected by the shift in the Chinese New Year with potentially some initial effects of the coronavirus outbreak. Per the company, cardholder spending overseas has taken a massive hit with people increasingly canceling their travel plans facing the threat. International transaction revenues account for nearly 34% of Visa’s net revenues.

Management at another leading company in the space, PayPal Holdings, Inc. PYPL, stated that its international cross-border e-commerce activity has been adversely impacted by COVID-19.  It expects a 1% dip in its first-quarter 2020 revenues. According to the company, although it is witnessing solid business traffic, it anticipates a downfall in its e-commerce traffic.

Mastercard, another leading player in the payment markets, estimated revenue growth for the first quarter to be 9-10% from the year-ago reported figure on constant currency (cc) basis (indicating a reduction of 200-300 basis points from the previous projection of growth in low-double digits). If the impact is restricted to the first quarter, management expects net revenue growth for the current year to be at the lower end of the view in low-teens at cc, indicating a decline from the year-ago reported figure.

Factors Cushioning Recovery After Brief Slump

Although the payments industry is in the grip of panic over the rapid spread of the coronavirus and the stock market is falling at a persistent rate, it should be noted that the drag is temporary. Also, digital payments are likely to see a boost as consumers shift to contactless channels to decrease the risk of infection that might emanate from handling cash.

The favorable economic indicators in the United States point to higher consumer spending, which in turn, should back transaction processing growth. 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.

Given other tailwinds like consistent growth in retail sales, mobile technology and the emergence of 5G networks, we assume that this coronavirus scare is a short-term blip for the industry.

Companies in this space are thus poised for growth in the long haul.

In fact, the price plunge is a great investment opportunity for investors seeking to invest in the payments space.

Visa, PayPal and Mastercard carry a Zacks Rank #3 (Hold) each and have lost 16.6%, 13.8% and 19.7% in a month, respectively, compared with the 13.8% decline of its Financial Transaction Services. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



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