US tech funds turn to Visa, Paypal as FANGs fade
25 October, 2018
Some tech-heavy US fund managers have turned to the once-stodgy payments sector as an alternative to so-called FANG stocks as high-flyers like Facebook Inc and Google parent Alphabet Inc falter.
Companies underpinning online shopping and mobile payments, such as Visa Inc, Mastercard Inc and PayPal Holdings Inc, offer above-average growth at a more reasonable valuation than FANGs and held onto more gains during recent market volatility, fund managers said.
Visa, for instance, is down 2.9 per cent over the last 3 months, compared with a 30 per cent plunge in Facebook and the Alphabet’s 13.5 per cent decline. The broad S&P 500 has fallen approximately 4.8 per cent over the same time.
“Right now we’re certainly looking at a test of the past (market) leadership and some of these FANG stocks have gotten ahead of themselves,” said Tom Plumb, portfolio manager of the Plumb Equity fund, who recently added a position in Square Inc.
“We’re looking with companies that have high recurring revenue and high growth, and not a lot of companies are in a better spot than the payments space.”
Fund managers from firms including Villere & Co, Plumb Funds, and Ave Maria Mutual Funds said they have moved out of the FANG group of Facebook, Amazon.com Inc, Netflix Inc and Alphabet that had led the market this year during the recent volatility because valuations did not appear sustainable.
The fund managers said they see the payments sector as a way to tap into growth in e-commerce and mobile computing at a more attractive multiple than FANGs.
Amazon trades at a trailing price-to-earnings ratio of 160.6, for example, while Visa trades at a P/E of 38.3.
“You’re getting a lot of the same disruption but at a fraction of the price,” said Lamar Villere, a portfolio manager at New Orleans-based Villere & Co, who has positions in Visa and transaction processing company Euronet Worldwide Inc. Euronet shares are up 33.9 per cent for the year.
Visa and MasterCard, in particular, are a way to tap into the growth of e-commerce without directly owning online sellers like Amazon, said Brian Milligan, portfolio manager of the Ave Maria Growth fund.
Online sales are expected to make up 17 per cent of all US retail sales by 2022, up from 12.7 per cent in 2017, according to Forrester Research.
“They are benefiting from the same secular growth as Amazon, but they are a duopoly,” Milligan said.
Investors have also been moving into payment-focused exchange-traded funds.
The ETFMG Prime Mobile Payments ETF, a USD 491 million exchange-traded fund that has PayPal, Visa and American Express Co among its largest holdings, has had positive inflows for all but one week since US stock market volatility started rising in early September, according to Lipper data.
The FANG-heavy Investo QQQ ETF, meanwhile, has posted outflows for 4 out of the past 6 weeks, according to Lipper.
But while improving US consumer spending and accelerating inflation have helped Visa and Mastercard domestically, mobile payments companies Paytm and Alipay are picking up customers in developing markets like India and China and bypassing Visa and Mastercard’s networks, said James Friedman, an analyst at Susquehanna.
Warren Buffet’s Berkshire Hathaway Inc took a USD 356 million stakes in Paytm in August, while Silicon Valley startup Stripe has signed partnerships with Alipay and WeChat Pay that allows merchants to accept payments from hundreds of millions of Chinese consumers.
“They are more ways to go around the Visa or MasterCard rails in emerging markets, and you have to wonder if their future market share is going to be bigger or smaller,” Freidman said.