Bernstein sees payment stocks resilient in recession scenario

On Friday, Bernstein analysts provided insights into the payments sector, evaluating the potential impact of a recession on the financial performance of various companies. The analysis draws on historical data from the 2008-09 economic downturn and adjusts for the current dynamic macro environment, business evolution, and geographical variations.

The report suggests that many companies in the payments industry could demonstrate relative resilience in the face of a recession. This resilience is attributed to factors such as international exposure to secular growth, the number of transactions which tend to be less affected by economic downturns, nominal purchase volumes that benefit from inflation, and stable pricing with recurring revenue streams.

During the 2008-09 period, the industry saw low single-digit (LSD) growth in card volumes, high single-digit to low double-digit (HSD/LDD) growth in the number of transactions, and a deceleration in cross-border growth to flat or down LSD. Debit spending increased by 10%, while credit spending decreased by 1%. E-commerce growth experienced a negative LSD, but Visa (NYSE:V) and Mastercard (NYSE:MA) maintained revenue growth of 9% and 4%, respectively, with Visa increasing pricing after its IPO. Payment processors like FISV and FIS witnessed flat to slightly negative growth.

In a potential recession scenario, FIS and Fidelity National Information Services (NASDAQ:III) (FI) are expected to be the most resilient, with only 1-2% negative revisions forecasted due to their recurring revenue streams. Global Payments Inc. (NYSE:GPN) might be more vulnerable due to its business mix. Visa (V) and Mastercard (MA) could see modest LSD negative revisions, assuming flat to LSD real GDP growth for the full year 2025, with 1-2 quarters of negative GDP growth, LSD inflation, and 4% card penetration-driven growth.

PayPal (NASDAQ:PYPL) is projected to face steeper negative revisions, with a 4% decrease in gross profit and high single-digit (HSD) reductions in earnings per share (EPS), given its exposure to discretionary e-commerce, credit businesses, and float income. Adyen (AS:ADYEN) is also expected to experience around 3 percentage point negative revisions on revenues and HSD percentage on EPS due to its focus on discretionary commerce and a third of earnings linked to float income.

Block, with its exposure to small and medium-sized businesses (SMBs), credit/lending businesses, and discretionary e-retail through Afterpay, is estimated to see around a 4% negative revision to gross profit and double-digit (DD) EPS revisions.According to InvestingPro analysis, Toast (NYSE:TOST) currently maintains strong fundamentals with revenue growth of 28.33% and a healthy current ratio of 2.44, indicating solid liquidity. Despite these strengths, Toast, which is exposed to new business formation, churn, and somewhat discretionary spending, is anticipated to have high single-digit (HSD) negative revisions on gross profit and double-digit (DD) EPS revisions in a recession scenario. The company’s weak gross profit margin of 24.09% could amplify these challenges.Toast’s current market capitalization stands at $18.75 billion, and InvestingPro analysis suggests the stock is slightly overvalued at current levels. For deeper insights into Toast’s valuation and growth prospects, investors can access the comprehensive Pro Research Report, which provides detailed analysis of key metrics and growth drivers among 1,400+ top US stocks.

In other recent news, Toast Inc. has reported strong fourth-quarter earnings, leading several analyst firms to adjust their price targets. DA Davidson increased its price target for Toast from $38 to $42, citing that the company’s total revenue and adjusted EBITDA exceeded expectations by 2% and 16%, respectively. The firm maintained a Neutral rating despite the promising outlook for 2025, which includes a projected 23%-25% growth in Non-GAAP FinTech & Subscription gross profit and a 37%-42% increase in adjusted EBITDA. Piper Sandler also reiterated a Neutral rating with a $35 price target, acknowledging the company’s nearly 40% growth in subscription and financial products gross profit and a significant EBITDA margin expansion. Mizuho (NYSE:MFG) Securities raised its price target from $40 to $45, maintaining an Outperform rating due to Toast’s strong financial results and growth initiatives in international and retail sectors. RBC Capital Markets adjusted its price target to $45, reflecting Toast’s promising expansion into new markets and a notable partnership with Hilton. The firm’s updated estimates for fiscal year 2025 now include revenues of $6.12 billion and adjusted EBITDA of $516 million. These developments highlight Toast’s positive financial performance and optimistic projections for the coming years.

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