Tuesday, June 16, 2020
Yesterday, I was interviewed on the TD Ameritrade Network to talk about a major new trend:
The surge in “contactless payments” that’s occurring because of Covid-19.
For example, Mastercard (MA) recently reported a 40% uptick in contactless payment volume.
This is no surprise to us. As you might recall, I put contactless payments on your radar months ago as a mega-trend in the making.
More specifically, I insisted that fears of spreading Covid-19 by exchanging dirty cash were forcing consumers to adopt contactless solutions.
I’ve studied technology adoption for decades. And as it relates to investing, I’ve determined that such “forced adoption” situations are the most consistently lucrative.
With that in mind, today I want to share five ways to invest in this mega trend…
Including two ways I wasn’t able to talk about during my media appearance due to time constraints.
Contactless Payment Play #1: Credit Card Companies
In recent years, an infrastructure buildout has been underway to upgrade point-of-sale payment terminals to accept contactless credit cards.
Visa (V) and Mastercard (MA) are the two juggernauts leading the charge behind this change because they already have large and loyal user bases.
They’ve been arming consumers with contactless cards, thereby forcing merchants to upgrade equipment to support them.
As a result, both companies represent low-risk ways to capture the upside from the contactless payment boom.
After all, the more consumers that use contactless payments, the more fees (and profits) both companies will generate. And share prices always follow profits.
Of the two companies, I prefer Visa.
Why? First, because it’s more reasonably valued, at a forward price-to-earnings ratio of 32 times, versus 44 times for Mastercard. And second, because its network is bigger, at roughly 1.2 billion card holders versus 900 million for Mastercard.
Add it all up — more fees and profits, more users, and a cheaper valuation — and there’s more room for shares to run.
Contactless Payment Play #2: Digital Payment Innovators
Now let’s move onto the second way to play this trend:
Square (SQ) and PayPal (PYPL).
These two Silicon Valley standouts continue to innovate in the payment space. For instance, PayPal is rolling out a permanent QR code feature so consumers can scan and pay for items touch-free.
Admittedly, in the payment space, these are the “new kids on the block.”
Square was founded in 2009 and PayPal in 1998, whereas Visa’s been around since 1958 and Mastercard since 1966.
But being younger and less mature means Square and PayPal offer more room for growth.
Last quarter, revenue growth checked in at 44% for Square, and 12% for PayPal. That compares to 6.6% at Visa, and 3.1% at Mastercard.
The only problem? Investing in growth often means paying up for it. No exception here:
Square and PayPal trade at eye-popping valuations of 130x and 98x trailing earnings, respectively.
If they experience any unexpected hiccups, shares are likely to quickly reverse course.
That said, their momentum is undeniable. Since the start of the Covid-19 contactless payment boom, Square is up 127%, and PayPal is up 85%.
Investors can mitigate the risk and ride the momentum here by using a 10% to 15% trailing stop.
Contactless Payment Play #3: Apple (AAPL)
Now let’s move onto the third way to play this trend: Apple.
I’ve been bullish on Apple’s payment solutions even before they hit the market in October 2014. And for good reason: no company has a bigger, more affluent, and more trusting user base.
You see, one of the key deterrents to mobile and contactless payment adoption has been security.
Apple customers know that its products are secure — and that’s helped the company quickly establish a user base that rivals the major credit card companies.
Consider: Apple Pay went from zero to almost 500 million active users in just five years. It took Visa and Mastercard decades to reach numbers like that.
But trust and growth aren’t the only fundamentals working in Apple’s favor. You see, since our smartphones are almost always in our hands, using Apple’s solution is effortless.
And since Apple doesn’t have to send users a new, costly contactless enabled credit card, the company’s margins for each incremental user are considerably higher than the credit card companies.
And again, more users generating more profits should lead to higher share prices.
Contactless Payment Play #4: Automation Companies
Now let’s move onto the fourth way to play this trend.
All the “obvious” contactless payment names are already enjoying momentum.
So we’d be well served to look for non-obvious companies levered to the trend. For example, automation systems and components suppliers.
Why? Because payment procedures aren’t the only things changing because of Covid-19. So are ordering procedures.
South Korea serves as the leading indicator here. For example, when I visited in 2017, ordering at every McDonald’s and Burger King was already being done via touchscreens.
Now this “human-less” process is expanding throughout the world. Recent news reports indicate that a major theater chain is replacing staff with automated snack bars and unmanned ticketing systems.
Now look for a similar transition to occur in restaurants and other traditionally service-oriented businesses.
Granted, it’ll take some digging to identify the makers of touchscreen systems and/or critical components for these systems.
But such under-the-radar opportunities often lead to market-beating profits. So the extra effort is likely to be handsomely rewarded.
I’m on the hunt right now, and will let you know when I find compelling opportunities.
Contactless Payment Play #5 – Mobile Payments ETF
And now onto the final way to play this trend:
Investing in trend-specific ETFs.
This can be a low-hassle, low-risk way to capture profits of any mega-trend — and an ETF for mobile payments already exists:
The ETFMG Prime Mobile Payments ETF (IPAY).
It holds meaningful positions in all the biggest players, including Visa, Mastercard, Square, and PayPal. But its diversification across 38 positions means any single stock failure won’t sink your portfolio.
Plus, it allows investors to easily invest in international contactless payment companies, as 32% of the portfolio is in non-US companies. These companies would otherwise be out of reach for the average investor.
Tack on a reasonable expense ratio of 0.75% and this provides an easy way to play the contactless payment boom.
But whatever option you choose, don’t miss out!
Ahead of the tape,