Concern that consumers are shifting to debit cards from credit cards is a long-term issue for Visa and Mastercard.
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Visa and Mastercard are looking like early casualties of the Omicron variant of the Covid-19 virus.
The big card networks rely heavily on revenues related to cross-border travel as consumers and businesses use their cards for plane tickets, hotels, and car rentals, as well as purchases in foreign countries. Forecasts for revenues and profits may need to come down if the Omicron variant puts the brakes on travel as countries reimpose bans or quarantine rules.
Shares of Visa (ticker: V) and Mastercard (MA) were trailing the market in trading on Monday. Visa was flat while Mastercard was off 0.6%, against a 1.5% gain for the S&P 500. Shares of both companies are down around 10% for the year, trailing behind the broader market’s 23% gain, due to concern about their long-term growth rates.
Investors had been counting on a recovery in cross-border travel to lift revenues for the card networks. And they had been seeing momentum as countries eased up on border controls over the summer and early fall.
The trends appeared favorable even a few weeks ago, with countries including Japan, New Zealand, Thailand, India, and Indonesia all relaxing restrictions in early November. The U.S. and Canada also eased up on rules for foreign travelers.
“The move towards reopening borders is a very big deal in Asia, and it’s happening faster than we expected,” Visa Vice Chairman Vasant Prabhu said at an investor conference on Nov. 16. With countries in other regions also easing restrictions, he added, “this would point to a faster recovery in the next few months than we might have expected even a few weeks ago.”
International transactions brought in $1.9 billion, or 21%, of Visa’s $8.9 billion in revenues for the fiscal fourth quarter, which ended in October. The segment is highly profitable, too, thanks to steep transaction and foreign-exchange fees. Cross-border margins come in around 69%, estimates MoffettNathanson analyst Lisa Ellis, contributing significantly to Visa’s overall earnings per share.
“The key catalyst for Visa’s stock is, simply, the recovery in cross-border travel,” Ellis wrote in a recent note.
Mastercard, for its part, was also counting on a big cross-border recovery. It noted in its latest earnings report that cross-border travel-related volumes had improved to 72% of 2019 levels in the third quarter and were tracking at 77% in October, “with substantial upside potential still remaining as and when borders open.”
Now, those assumptions may have to be revised as countries in Europe and elsewhere reimpose travel bans and consider other measures to curb the spread of the Omicron variant. Travel from Southern African nations is now being curtailed in Europe and other regions. Israel is banning all foreign nationals from entry.
Some analysts are urging investors to look beyond near-term weakness in the stocks. Mizuho Securities’ Dan Dolev, who has Buy ratings on both Visa and Mastercard, says the stocks’ recent declines look like a “knee-jerk reaction” to the virus news.
“We’ve all been waiting for the step-up in cross-border travel and I think all this does is delay the inevitable,” he said in an interview.
Still, the card networks were already facing an uphill battle with investors, due to a variety of secular growth worries. Among them are concerns that consumers are shifting to debit, away from higher-margin credit cards. Consumers are also using more alternative payment methods that may bypass the card networks, including “buy now pay later” services offered by companies like Afterpay (AFTPY) and Affirm (AFRM).
Visa has also come under pressure from a recent announcement by Amazon.com (AMZN) that it will stop accepting Visa-branded credit cards issued in the United Kingdom, starting next year.
The bullish spin on the stocks is that their weakness creates the potential for bigger gains in a recovery scenario. The stocks could undergo a relief rally if the Omicron variant fails to beat out Delta as the dominant virus. Much about Omicron remains unknown, and vaccine developers including Pfizer (PFE) and Moderna (MRNA) have indicated they could have tailor-made vaccines ready in a matter of months.
For now, though, investors don’t appear willing to give shares of the card-networks the benefit of the doubt.
Write to Daren Fonda at [email protected]
