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Reuters/Charles Platiau
On the defensive.
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As tech giants like Facebook stumble, analysts say payment companies are a better bet

By John Detrixhe

Big Tech companies have hit a speed bump. After powering market gains in recent years, investors are questioning whether the likes of Facebook can keep growing at awe-inspiring rates. With business models that rely on selling user data to advertisers are under fire in Washington and Brussels, there are better ways to bet on technology, some market watchers say.

Analysts at Morgan Stanley have recommended rotating out of technology stocks; they think payment businesses like Visa, PayPal, and Worldpay are better bets for investors’ portfolios. Even if the economy slows down, such companies will benefit from growth in electronic transactions as well as consumer spending, which tends to hold up better than most investors appreciate, they said. ”These are some of the best businesses there are,” a research note reads, written by analysts led by James Faucette.

While Amazon has soared some 80% over the past year, investors are fretting about whether companies like Netflix, whose subscriber growth recently missed forecasts, can keep up the pace (it’s up by 84% since this time last year). Facebook has plunged by almost a fifth (paywall) after warning revenue growth could slow, raising questions about growth of its user base and its ability to sell advertising amid data-privacy concerns.

While payment companies are far from unscathed—PayPal has fallen by about 10% in the past week—Morgan Stanley thinks these firms have bright prospects. Amid fears of Amazonification and the retail sector’s continuing shift online, small- and medium-sized business are willing to pay extra for payment services, whether for cyber and fraud security or customer analytics, the analysts said.

Some companies also benefit from barriers to entry. Visa and Mastercard run payment networks that are difficult to replicate. At the same time, the total purchase volume on cards will increase to $28.3 trillion by 2020, from $20.9 trillion last year, according to Morgan Stanley forecasts. Corporate payments are also a big opportunity: In the US, more than half of the $16.5 trillion of annual business-to-business payments are still made by check.

And then there’s the chance for buyouts to boost share prices. Some companies may look to purchase payment firms to obtain their technology and increase in scale. The fear of Chinese fintech giant Ant Financial could add urgency to the industry’s mergers and acquisitions spree. As the Alibaba affiliate looks for growth (paywall) outside its home market, incumbents may feel the need to bulk up more quickly to compete.

John Detrixhe
Future of Finance Reporter
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