When picking investments, looking at the things that people use and do every day is a solid place to start.
The more people who use a product or service, the larger the market, and the more money there is to make in that industry. Payment processing stocks fit the bill.
While it is somewhat saturated, buying payment processing stocks can be an important part of a well-rounded portfolio. The need for payment processing is fairly predictable and stable. Plus, there could even be room for the industry to grow as more governments move away from cash.
The line of thinking here is that cash is what people who exist outside the system use. From terrorists to organized crime, tax evaders to the black market, it’s all run on cash.
“Cash is nearly impossible to trace and expensive to produce (pennies cost twice as much to make than they are worth),” explains MagicDiligence on Seeking Alpha. “Already, governments are moving to expedite the process to electronic payments.
Perhaps the most stunning example is in India, where a demonetization of 100 and 500 rupee notes (85% of the total currency) led to widespread disruption.”
Some say it is a “War on Cash” – whatever you call it, it leaves room for upside. James Faucette, an analyst at Morgan Stanley, predicting the top-performing payment companies to grow their earnings at a rate of 15% per year through 2020, continuing and building on the 11% growth per annum they saw from 2015 through 2017.
The Pros and Cons of Investing in Payment Processing Stocks
Payment processing is certainly growing and there are still places in the world where credit cards and digital payment systems have yet to be fully adopted.
Some payment processing companies are putting themselves in a position to “cash-in” on cashless transactions, be it a developing country or a cheaper way for small businesses to accept credit cards.
As these technologies become more ubiquitous, opportunities for real, sustainable growth appear. However, as stable as payment processing can be, it is still vulnerable. There are many payment systems on the market.
All that competition could mean that a payment processing company is left to the wayside if the people-at-large overwhelmingly choose another provider.
Is Square Stock Worth Buying?
Square (NYSE: SQ) is a payment processing company geared toward small businesses.
Through a card reader that mounts on a smartphone or tablet, small business owners anywhere with coverage can accept credit card payments.
That’s where the bulk of its business comes from right now, but Square has been diversifying.
The company is getting into the small business services business with customer management tools, payroll services, and even loans for working capital. – and it has paid off.
Now, the company is getting into lending. On October 4, 2018, Square announced a new payment option called Installments.
It allows people to pay for purchases of $250 to $10,000 in installments over three, six, or 12 months – some with 0% APR. What sets this program apart from many others is the lack of minimums.
Often, these financing programs place requirements on the sellers that they have a certain minimum annual sales or number of financed transactions to be able to offer purchases on credit.
Square doesn’t do that so any small business that uses Square can participate if the payment processor feels they would be a good fit.
Square has been growing by leaps and bounds, up a whopping 100% on average over the past few years yet it still struggles to be profitable.
Although Square’s share price is 6X higher than it was at the end of 2016, its revenues haven’t matched share price growth rates. Justifying that high of a share price in light of its lack of profitability is a real challenge.
The issue isn’t whether Square is a good payment processing company – it’s whether that company is worth your investment at its current share price.
Growth investors should not be surprised to see the pace of growth slow down or even retreat.
The word is out that Square is also dabbling in cryptocurrencies so speculative investors may be rewarded by a growth lever that has not yet been monetized in any meaningful way.
Is Visa Stock Worth Investing In?
What’s in your wallet? Probably a Visa card, which is one of its strongest points – and the company makes money from both sides of the table. It earns swipe fees every time someone pays with a Visa card and it earns revenue from processing payment transactions. In total, the company processes roughly $2 trillion payments every quarter.
The credit card and payment processing company is also the largest player in business-to-business card transactions, like corporate cards – but don’t go thinking that its opportunities for growth are maxed out. Visa (NYSE: V) has some interesting irons in the fire.
For instance, the company recently partnered with PayPal (NASDAQ: PYPL), so it could start to offer more mobile payment solutions, including contactless transactions.
It also has some important deals that allow for instant deposit with merchants. It is called Visa Direct. Basically, when a small business owner swipes your credit card, the money would go directly into the store checking account, instead of needing to go through so many channels (and days) until the merchant receives his money.
In emerging markets, Visa is using QR code readers to process payments – potentially opening up worlds of possibility. “Visa finds itself very well positioned to continue to grow in the future,” says Michael Kramer, founder of Mott Capital Management LLC. “The usage of the digital currency is not only becoming more accessible and more convenient but also a necessity for e-commerce transactions. Should the strong growth trends continue, resulting in even more substantial profits, then the stock may continue to rise over the long term.”
Visa’s stock was up over 28% in the first nine months of 2018 and everyone from analysts to technical advisors are forecasting that its share price will continue to rise, by 8% and 12% respectively.
Visa v Square: Which Stock is Better?
On the one hand, Visa is a solid performer with a large following who is making investments in emerging markets and mobile payment solutions.
On the other hand, Square is priced high relative to its earnings and it could have run its course. At the same time, the payment processor has some opportunities in focusing on small businesses and trying to address their other needs. Plus, there is its push into lending to consider.
Which stock is better depends on what you think will happen next.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.