Morgan Stanley has cooled on the tech sector, but analysts there still see big potential for payments companies.
The team at Morgan Stanley, led by James Faucette, upgraded the payments and processing industry to attractive on Thursday, citing a number of key trends that could underpin growth in the quarters to come. Among them: “resilient” consumer spending, share gains for electronic payment methods, network effects and pricing power.
Morgan Stanley’s sector ratings are attractive, in line and cautious.
“These are some of the best businesses there are,” Faucette wrote of payments companies. Morgan Stanley strategists have recently recommended that investors take a more defensive stance in their portfolios, and Faucette views Visa Inc. V, -0.60% and Mastercard Inc. MA, -1.11% as particularly well-positioned to withstand negative economic circumstances.
In general, he argues that Wall Street “is underestimating the secular push from digitization” as well as the robustness of consumer spending. Nominal personal-consumption expenditures have declined just once over the past 60 years, Faucette wrote, and consumers continue to gravitate toward digital payment options and away from cash. He thinks that transition could get a boost as payments companies roll out new options that allow for business-to-business transactions via electronic means, rather than through checks or the bank rails.
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MarketWatch has spoken with both Mastercard and Visa recently about their B2B strategies. Mastercard’s head of commercial payments James Anderson said that the company intends to bring “the same level of uniformity” to business payments as the company has brought to consumer card transactions. Visa Chief Financial Officer Vasant Prabhu sees his company’s B2B tools as being able to provide “cost savings relative to check or wire transfer.”
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The card networks and others in the industry have benefited from strong pricing leverage, and Facuette doesn’t foresee a change in the near future. “Pricing competition has become less important in payments, and instead merchant acquirers in addition to networks seem to have gained pricing power,” he wrote.
Faucette’s optimism for the payments industry comes just over a week after Morgan Stanley strategists downgraded the tech sector to underweight, citing tariff-related uncertainty and high valuations.
See more: Tech sector has ‘a false sense of security’ and is vulnerable, Morgan Stanley says
Visa, Mastercard, PayPal Holdings Inc. PYPL, -0.96% and Worldpay Inc. WP, -0.05% are Morgan Stanley’s top overweight names, though the firm is also bullish on GreenSky Inc. GSKY, +0.23% and FleetCor Technologies Inc. FLT, +0.09%
Faucette downgraded shares of On Deck Capital Inc. ONDK, -3.06% to underweight from equal weight on Thursday, and he lowered his rating on LendingClub Corp.’s LC, -2.61% stock to equal weight from overweight. That said, he argued that “even our underweight stocks” likely won’t see much “absolute downside” going forward, as the ratings are assigned based on how Morgan Stanley expects a given stock to perform relative to industry peers.
Visa shares are up 43% over the past 12 months, while Mastercard shares have gained 61%. The S&P 500 SPX, -0.26% has risen 14% in that time.
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