What happened
Shares of several payments stocks struggled today amid higher inflation and the market's inability to find support as the Federal Reserve weighs key policy decisions that could significantly impact the economy.
Shares of Block (SQ -1.57%), formerly Square, had fallen roughly 5.5% as of 12:07 p.m. ET today, shares of Mastercard (MA -0.07%) were down about 2.5%, and shares of StoneCo (STNE 0.32%) were down nearly 6%.
So what
The Nasdaq Composite had fallen nearly 2.5% at the time of this writing, with the Federal Reserve's rate-setting Federal Open Market Committee beginning its first meeting of the year, which wraps up tomorrow. While not much news is expected out of the meeting, investors and analysts will be watching closely for clues about when the Fed will begin raising its federal funds rate, as well as plans for potentially shrinking its balance sheet.
Payments stocks like Block, Mastercard, and StoneCo have not had an easy last six months, with Block down 58%, Mastercard down about 14%, and StoneCo down about 75%. Much of what these stocks do is tied to spending. While spending has sharply rebounded from beaten-down levels during the pandemic, there are still sectors like travel and lodging that are not quite back yet.
Image source: Getty Images.
Additionally, while COVID-19 has subsided in a lot of ways, there are still a lot of limits on international travel, which can limit revenue for many payments companies. Morgan Stanley analyst James Faucette in a recent research note a few days ago said it still could be a while before the market warms to these stocks. He cited the fact that international tourism still has not returned and that volatility with interest rates has spooked some investors.
"We anticipate that the market will likely be conservative in extrapolating generally improving travel conditions," Faucette wrote, adding that rising rates will likely have "very small consequences to payment volumes or the underlying profitability."
Meanwhile, StoneCo has been dealing with its own unique issues, as inflation in Brazil recently surpassed 10%, largely due to higher gas prices. Analysts at Evercore ISI trimmed their price target on StoneCo today from $58 to $30 per share, which actually still provides tremendous upside from the current price of just under $14 per share.
Now what
Ultimately, a lot of the performance of these payments companies is tied to the performance of the economy. While many experts in the U.S. are projecting around 4% gross domestic product (GDP) growth this year, which would be considered huge growth, forecasts have now been cut and I think the market is skeptical about this growth, given the surging inflation and potential for three or four rate hikes this year.
The International Monetary Fund (IMF) today cut its projections for global GDP growth to 4.4% this year, which is smaller than the nearly 5% GDP growth previously expected. The IMF cited factors such as the omicron variant, supply chain issues, and high inflation as reasons for the reduction. The IMF in this new forecast also revised down its growth projections for the U.S. and China.
Despite the uncertainties, I do see long-term opportunities in Block, Mastercard, and StoneCo, given the fact that payments around the world are becoming much more digitized due to the pandemic. But in the near term, volatility remains, so the pain might get worse or the recovery may take longer than expected.
