The rapid rise of the U.S. dollar may be good news for Americans planning to travel and shop abroad, but it is a mixed bag for the payments companies that facilitate that spending.
Analysts at J.P. Morgan Securities cut their forecasts for earnings at Mastercard MA +0.26%, Visa V –0.14% (V), PayPal PYPL +3.22% (PYPL), and several other large-capitalization payments companies, arguing the stocks are in a “holding pattern.” But despite the lowered expectations, the analysts still hold Overweight ratings on the stocks, saying they expect that the companies will reiterate their financial forecasts for the full year on a constant currency basis when they report their second-quarter results.
So far this year, the Dollar Index, which tracks the greenback relative to a basket of other currencies, is up 11.3% as rising interest rates encourage investors to buy the buck. Just this month, the dollar reached parity with the euro for the first time in more than 20 years. This is great for people looking to spend dollars abroad, but U.S. companies that rely on revenue from overseas will find that their earnings decrease when factoring in currency conversions.
It matters a lot to the payments companies. Mastercard got roughly 68% of its revenue outside of the U.S. in 2021 while Visa and PayPal got 54% and 44%, respectively.
“Given significant USD appreciation against key currencies since last results season, multinational payment names should see reported FY22 revenue growth negatively impacted in low-single digits,” Tien-tsin Huang, analyst at JPMorgan, wrote.
Huang is cautious but optimistic on the sector even as many on Wall Street forecast a recession in the next year. Worries are for “a mild, rather than harsh recession” and employment remains relatively healthy, he said, a combination of factors that mean spending shouldn’t see too much of a drop. Also on the positive side is that spending is still recovering from its pandemic-era slump,he said.
Still, Huang lowered his price targets on shares of several payments companies to reflect his reduced forecasts for their earnings. He sees Mastercard shares hitting $425 apiece by the end of the year, down from previous expectations of $430. His estimate on PayPal shares fell by $15 to $112, while his call on rival Block SQ +7.99% ( SQ ) slid by $43 to $107 a share. Visa’s price target held steady, at $270 a share.
Even with those price-target cuts, J.P. Morgan is still projecting double-digit gains for those stocks, based on recent trading levels. It’s just a matter of cooling expectations/