The world has been shifting toward digital payments for years, and the trend took off during the pandemic when contactless payments became the standard.
According to Grand View Research, the global digital payment market is expected to grow at 20% annually through 2030. Visa (V -0.23%), American Express (AXP -0.62%), and PayPal (PYPL 2.90%) are three payment companies that stand to benefit from these long-term trends. Here's why they are solid stocks to buy in October.
1. Visa dominates the payment space
When it comes to processing payments, nobody does it on the scale that Visa does. In 2021, Visa had $10.9 trillion in total payment volume and 3.9 billion cards in circulation. Its payments volume is nearly twice as much as the second-place competitor, Mastercard.
Visa has consistently dominated the payment space thanks to its robust network effect. The company has had 65 years to build up its merchant and customer base. As more merchants accept Visa cards, more customers use them. This growth cycle allowed Visa to reinvest in the business, scale up, and improve security features, contributing to its stellar growth.
V Profit Margin data by YCharts.
Visa's overhead costs are low, too, meaning the company is highly efficient at generating profits. Over the last decade, Visa's profit margin has averaged just under 47%. The company has continued to perform well despite inflation and fears about a potential recession. Through the first nine months of its fiscal year (through June 30), Visa's revenue is up 12%, while its net income has grown 14%.
Visa is a rock-solid payments company that dominates the space -- making it a solid stock to buy and hold for the long haul.
2. American Express' strong brand gives it resilience
American Express operates the third-largest payment network. Its business is similar to Visa and Mastercard because it earns fees for payments processed through its network. However, American Express also holds loans on its balance sheet, which helps it generate interest income.
Holding loans could expose a company to credit risk if customers default in waves. However, its strong brand associated with luxury gives it a premium customer base that could better weather downturns. Its brand is also why Berkshire Hathaway CEO Warren Buffett likes the stock, saying, "I could do all kinds of things with hundreds of billions of dollars, but I can't put in the minds of people what is in their minds about American Express."
Its strong credit quality was on display in the second quarter. While the banking industry saw a 3.15% charge-off rate on credit card loans, American Express' was around 2%. The company also grew network volume by 11% and total revenue by 17% in the first half of the year, thanks to higher interest rates and strong growth from millennial and Gen Z card members.
American Express is a quality company with a robust brand, making it another excellent payment stock for long-term investors.
3. PayPal stock is at its lowest valuation ever
Over the last two years, PayPal went from a high-flying fintech to a beaten-down stock that can't get any traction. During the pandemic economy in 2020 and 2021, PayPal's growth skyrocketed. The fintech added 122 million new accounts and passed $1 trillion in payment volume while revenue grew by 43%.
Its incredible pace of growth was unsustainable, and management acknowledged this when it changed its focus. It shifted away from adding new customers and toward getting the most out of existing customers by getting them to increase their usage of the payment platform. Since its peak price in 2021, PayPal stock has fallen 81%.
It's not as if the business is doing poorly. Through six months this year, PayPal has grown revenue by 8%. It's also reigned in its expenses, posting a net profit of $1.8 billion through six months, a drastic improvement from $168 million last year.
PYPL PE Ratio data by YCharts.
PayPal recently brought in a new CEO, Alex Chriss, to replace outgoing CEO Dan Schulman. Chriss was previously the executive vice president and general manager of Intuit's small business and self-employed group, and will look to get PayPal back on the right track. At 16 times earnings and just 10 times forward earnings, PayPal stock has never been cheaper -- making now an excellent time to scoop up shares of the fintech.
