The last few years have proved a rocky ride for those investing in companies in the payments industry. The pandemic prompted an acceleration in the move to digital, and the sector raced ahead of the broader stock market.
However, recent concerns about levels of economic activity have seen most of that outperformance erased.
The industry is still forecast to outgrow the broader economy over the next few years, but it’s becoming increasingly competitive.
Here are three companies we think are well-positioned to deliver value to customers and shareholders.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future. Ratios shouldn’t be looked at on their own.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
Adyen
The growing number of payment methods on offer can be a confusing and challenging landscape for businesses. Adyen offers them the ability to accept a huge variety of payment methods via one simple integration. This includes major credit and debit cards, E-wallets, online banking, buy now pay later and more.
This has allowed Adyen to enjoy revenue growth of over 30% in each of the last five years and with that comes high expectations from investors.
Adyen currently trades at a premium to its peer group, despite the pressure the valuation has come under following a recent earnings miss. The valuation now stands at less than half the long-term average.
However, there’s been a resurgence of investor confidence following this month’s investor day. This indicates some belief in management’s reduced medium-term growth target in the low to high 20s.
That’s not exactly pedestrian though, and risks like a slowdown in consumer spending and price competition from the likes of PayPal’s Braintree remain very real. There could be further ups and downs.
But Adyen is still regarded as the best-in-class payments processor and with that comes opportunities.
Its access to such a wide range of payment networks means it can help merchants to improve authorisation rates, or in other words, reduce the level of failed transactions.
We believe this can help Adyen maintain pricing and grow market share, particularly outside the US where payment methods are more diverse and authorisation rates are relatively low.
Adyen is seeing particularly strong growth from its unified commerce offering. This enables businesses to take payments from all of the sources previously mentioned in both an online setting and in physical stores.
Adyen’s market share in the offline world is considerably less than in online. We see this part of the business as a strong driver for future growth if it can bridge this gap.
See the latest Adyen share price, and how to deal
Paypal
We see Paypal’s well-known branded button as its key attraction, with some 400mn consumers worldwide actively using their PayPal wallets.
Lately, PayPal’s been focusing on growing the unbranded side of the business. However, investor concern about the relatively low margins compared to branded means that the aggressive discounting we’ve seen in processing might not continue.
That’s just as well because PayPal’s had to resort to cost-cutting in order to offset the lower profitability of its processing arm Braintree. There’s only so long that can continue.
It’s a complex picture for the new captain of the ship, Alex Chriss, to navigate. But having both a processing capability for merchants and a strong position with consumers presents an opportunity.
The PayPal button might not be perfect, but it’s popular and a name that consumers trust. This allows PayPal to charge a higher ‘take rate’ than some other payment providers. But the customer journey has been a little behind the times.
PayPal has been modernising its solution and by bundling an improved one-click button with Braintree, PayPal’s been hoping to revive growth in its higher-margin business.
However, Braintree is mainly focused on larger merchants whereas the PayPal branded business is more focused on small and medium-sized businesses.
The launch of a processing solution for smaller companies this year provides an opportunity to reengage PayPal’s target retailer market and shore up growth in branded revenues.
With the valuation well below the long-term average, the market’s not expecting a huge turnaround. This could present an opportunity for investors if PayPal can retain a critical role in the payments ecosystem.
Alex Chriss has got off to a steady start, but it’s still very early days and there can be no guarantees. The risks are also heightened by the deteriorating outlook for the economy.
See the latest PayPal share price and how to deal
Mastercard
Despite fierce competition in the rest of the payments world, the card networks remain dominated by two giants, Visa and Mastercard.
They enable banks to issue credit and debit cards without either network having to take any credit risk. And despite the emergence of competing payment methods, card usage continues to grow across the industry in good times and in bad.
In the UK alone, card payment volumes grew close to 20% last year, driven in part by more people using contactless. Mastercard has grown revenue in all but one year since 2006.
Mastercard has a more even geographical mix than its arch-rival Visa, which is particularly dominant in the United States. Cash to card migration has all but run its course across the pond. But in some markets, like Europe, there’s still a tailwind to ride, which should blow in Mastercard’s favour.
Services are also an important and faster-growing part of the business, and one where Mastercard appears to be stealing an edge over its rivals.
Growth is being driven by demand for cyber security. Intelligence solutions are also playing their part and provide valuable insight from the huge data sets that come from processing payment volumes in the trillions of dollars every year.
Recent financial performance has been encouraging, but management does see some headwinds forming.
Mastercard’s revenue is forecast to outgrow Visa in the next few years, which we believe is down to some of the structural differences discussed above. This is reflected by its valuation sitting at the top end of its peer group on a price-to-earnings basis, which adds pressure to deliver.
See the latest Mastercard share price and how to deal
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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