We recently compiled a list of the 10 Best Credit Card Stocks to Buy Now. In this article, we are going to take a look at where Discover Financial Services (NYSE:DFS) stands against the other credit card stocks.
The market for credit card issuance services has expanded significantly over the last several years. At a CAGR of 9.2%, it will grow from $478.09 billion in 2023 to $522.22 billion in 2024, according to the Business Research Company. Over the coming years, a significant expansion in the market size for credit card issuance services is anticipated. At a CAGR of 8.3%, it will increase to $717.7 billion in 2028, as per the research. Contactless payment usage, data security concerns, cryptocurrency emergence, embedded finance, customization, and personalization are all factors contributing to the growth in the projection period.
The credit card market is still changing, mirroring changes in customer preferences and general economic conditions. According to the Q4 2023 Quarterly Credit Industry Insights Report (CIIR), the average credit card debt per borrower at the end of 2023 was $6,360, a 10% rise YoY. This resulted in a total of $1.13 trillion in credit card debt in the United States the same year. Moreover, the average amount owed by households in the 90th percentile is $11,210, with higher-income households often having larger loads.
According to TransUnion, credit card usage continues to rise, with 167.2 million users expected by mid-2023, representing a substantial rise over the last three years. Furthermore, according to the Federal Reserve Bank of San Francisco, credit cards accounted for 31% of all payments in 2022, although less than 10% of Americans typically utilized cash, according to a December 2023 Forbes Advisor survey.
As per the Federal Reserve Board, credit card delinquency rates have been rising gradually and will reach 3.1% by the end of 2023, the highest level since 2011. Additionally, charge-offs rose in Q2 2024 from 4.16% to 4.38%, a record high of 12.5 years that hasn’t been seen since Q4 2011. Meanwhile, according to Forbes Advisor, the average credit card interest rate in March 2024 was 27.89%, putting financial strain on people with balances.
In the future, digital payment methods are expected to gain popularity; according to a survey conducted in August 2023, more than half of customers preferred digital wallets over traditional cards. This change shows that credit card companies will continue to innovate, even as concerns about interest rates and debt levels persist.
Overall, as we have also mentioned in our article, “7 Best American Bank Stocks To Buy According to Hedge Funds,” the U.S. market for digital banking platforms was estimated at $1.04 billion in 2024 and is projected to grow at a CAGR of 9.63% to reach $2.04 billion by 2031.
Looking forward, according to a report, credit card spending is predicted to increase in the mid-single digits by 2024, while balances will fall to the mid-to-high single digits after a substantial rise since 2022. If labor markets are steady, credit performance measures are expected to decline during 2024 and stabilize by early 2025. Despite lower inflation, key problems include resumed student debt payments, high interest rates, and growing living costs.
Yanni Koulouriotis, CFA, Vice President – Global FIG stated:
“Overall, DBRS Morningstar expects a less favorable operating environment for credit card issuers in 2024 as consumer dynamics shift and are less of tailwind to credit card issuer performance. While we expect weaker financial performance in 2024 compared to 2023, we still expect performance to be supportive of current credit ratings.”
Methodology:
We sifted through holdings of credit card ETFs and online rankings to form an initial list of 20 credit card stocks. Then we selected the 10 stocks that were the most popular among institutional investors. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. We have used the stock’s market cap as a tie-breaker in case two or more stocks have the same number of hedge funds invested.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A business professional in a suit swiping their credit card at the store.
Discover Financial Services (NYSE:DFS)
Number of Hedge Fund Investors: 68
Market Cap as of September 9: 32.31 billion
The American bank Discover Financial Services (NYSE:DFS) operates in two different business segments: payment services and direct banking. It is also one of the largest card issuers in the USA. As one of the best credit card stocks to buy, the company produces both credit and debit cards, together with other consumer banking products.
Moreover, it runs the Diners Club, Pulse, and Discover networks. Based on total purchase volume, the Discover network ranks as the fourth-biggest payment network in the US, while Pulse is among the biggest ATM networks in the whole country.
Among its rivals, Discover has continuously produced returns on equity that are among the highest. The company showed resilience in Q2 2024 when it achieved 70% YoY growth in net income to $1.5 billion, mostly from the sale of its portfolio of private student loans and a successful settlement of lawsuits.
Capital One stated earlier this year that it will acquire DFS for $35.3 billion. Consumers may be impacted by the transaction in the future, although the agreement is not anticipated to be finished until late this year or early 2025. The companies are currently seeking permission from authorities and shareholders, and the proposal has already drawn attention from legislators across the political spectrum.
Despite the strong earnings from the American bank, analysts are still fixated on the possible deal. Due to increased competition in the Visa and MasterCard-dominated payment processing market, financial experts feel that the merger could benefit both Capital One and Discover Financial Services (NYSE:DFS). Since issuers would have to compete by providing more alluring credit card advantages, this increased competition may result in improved incentives and rewards for customers.
Barclays maintained its Equal Weight rating on the shares after the Q2 report 2024 and raised the company’s price target on Discover to $137 from $135. In a research note, the analyst informs investors that the company posted a strong beat and that credit is on pace.
Glenn Greenberg’s Brave Warrior Capital is the largest shareholder in the company, with 3,460,972 shares worth $452.73 million.
Overall DFS ranks 8th on our list of the best credit card stocks to buy. While we acknowledge the potential of DFS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DFS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
