Mad Hedge Technology Letter
January 10, 2020
Fiat Lux
Featured Trade:
(FINTECH IS GOING INTO OVERDRIVE)
(PYPL), (SQ), (MA), (V)
Tag Archive for: (V)
Last year was the year of Fintech and 2020 is the year when this industry goes into overdrive.
Let’s take a look at one of my top choices, PayPal (PYPL).
Millennials are the primary customer demographics to the main platform, but the attractiveness of peer-to-peer payment system Venmo is gaining momentum.
PayPal should be on a short list of fintech stocks for investors and there is certainly more room to run for the share price.
Last quarter’s numbers of 9.8 million net new actives mean that PayPal now has 295 million active accounts across all platforms.
Engagement continues to be a bright spot growing by 9% to almost 40 transactions per active account.
Mobile is a major contributor to success with 172 million consumers and 13.8 million merchants.
Venmo processed more than $27 billion in volume for the quarter, growing 64%.
They are doing $300 million in payments per day and an annual run rate that now exceeds $100 billion.
The Venmo team recently inked a deal with Synchrony to provide a Venmo credit card.
Credit products continue to be another gateway to more success with new consumer installment plans in the United States and Germany which allow PayPal customers to pay with streamlined monthly payments.
This capability is already leading to incremental sales and led to signing a long-term strategic partnership agreement with Citi Australia to develop consumer credit products for PayPal's customers in Australia.
Additional relationships were further expanded with Walmart launching PayPal Checkout as the sole payment instrument for its online grocery business in Mexico.
In Japan, PayPal is one of the official partners for the Japanese government's plan to promote cashless payments throughout the country.
PayPal now offers account linking through mobile devices with Capital One and PNC Bank in the United States.
If you thought their international strategy stopped there, there are other irons in the fire.
PayPal became the first non-Chinese payments company to be licensed to provide online payment services in China.
They announced in September that the People's Bank of China has approved a 70% equity interest in GoPay, a license provider of online payment services.
China is a tricky revenue proposition and it’s not guaranteed to flourish on the mainland, but this shows the pro-active way that PayPal seeks to expand its total addressable market and long-term growth prospects.
The license enables PayPal to expand upon relationships with existing partners like China Union Pay and AliExpress and forge fresh partnerships with China's financial institutions and technology platforms.
PayPal’s success has so far depended on innovation and acquisitions - I fully expect this trend to continue in 2020.
PayPal announced it was buying shopping and rewards platform Honey Science Corporation for $4 billion.
This year is the beginning of another compelling one-year bull case aided in part by higher expectations from those diverse set of partnerships, such as with MercadoLibre Inc. and Uber Technologies Inc., along with PayPal’s pricing, Honey online coupon transaction, and Venmo monetization.
I anticipate further sustained overperformance in margin expansion as well.
I expect an overall payments industry-wide volume growth of 11% in 2020 and PayPal will grow into its position in a still healthy broader economy.
Payment sector operating metrics, from credit card volume growth, to enterprise IT budget growth, to U.S. employment growth, are robust supporting the bull case for PayPal in 2020.
Aside from PayPal, my alternative favorites in the payments space that could see anywhere from 7%-20% share appreciation in 2020 are Square (SQ), Mastercard Inc. (MA), and Visa Inc. (V)
It is likely that 2020 will signal a new decade of super growth for the digital payments market.
And I expect PayPal to increase its solid footprint in web, in mobile app platforms, and in retail stores globally through organic growth, acquisitions, and partnerships.
PayPal’s profitable business model and pro-active management will help the share price reach new highs.
However, not only for fintech stocks, but the overall market is ripe for some profit-taking in the short-term because of the recent melt-up.
Mad Hedge Technology Letter
November 18, 2019
Fiat Lux
Featured Trade:
(THE FANG’S BIG MOVE INTO BANKING),
(GOOGL), (MSFT), (APPL), (MA), (V), (PYPL), (SQ), (GS), (FB)
First, Apple (APPL) collaborates with Goldman Sachs’ (GS) offering of a credit card even giving credit access to subprime borrowers.
And now Google (GOOGL) has its eyes on the banking industry — specifically, it’ll soon offer checking accounts.
In a copycat league where anything and everything is fair game, we are seeing a huge influx of big tech companies vie for the digital wallets of Americans.
The project is aptly named Cache and accounts will be handled by Citibank (C) and a credit union at Stanford.
Google’s spokesman shared with us admitting that Google hopes to “partner deeply with banks and the financial system,” and further added, “If we can help more people do more stuff in a digital way online, it’s good for the internet and good for us.”
I would disagree with the marginal statement that it would be good for us.
Facebook (FB) is now offering a Pay option and how long will it be until Amazon (AMZN), Microsoft (MSFT), and others throw their name into the banking mix.
I believe there will be some monumental failures because it appears that these tech companies won’t offer anything that current bank intuitions aren’t offering already.
Moving forward, the odd that digital banking products will become saturated quickly is high.
Let’s cut to the chase, this is a pure data grab, and not in the vein of offering innovative services that force the consumer down a revolutionary product experience.
As the consumer starts to smarten up, will they happily reveal every single data point possible to these tech companies?
Big tech continues to be adamant that personal data is secure with them, but their track records are pitiful.
Even if Google doesn’t sell “individual data”, there are easy workarounds by just slapping number tags on aggregated data, then aggregated data can be reverse-engineered by extracting specific data with number tags.
The cracks have already started to surface, Co-Founder of Apple Steve Wozniak has already claimed that the credit algorithm for Apple’s Goldman Sach’s credit card is sexist and flawed.
Time is ticking until the first mass data theft as well and let me add that the result of this is usually a slap on the wrist incentivizing bad behavior.
I believe big tech companies should be banned from issuing banking products.
Only 4% of consumers switched banks last year, and a 2017 survey by Bankrate shows that the average American adult keeps the same checking account for around 16 years.
As anti-trust regulation starts to gather more steam, I envision lawmakers snuffing out any and every attempt for big tech to diversify into fintech.
It’s fair to say that Google should have done this 10 years ago when the regulatory issues were nonexistent.
Now they have regulators breathing down their necks.
Let me remind readers that the reason why Facebook abandoned their digital currency Libra was because of the pressure lawmakers applied to every company interesting in working with Facebook’s Libra.
Lawmakers threatened Visa and Mastercard that they would investigate every part of their business, including the parts that have nothing to do with Facebook’s Libra, if they went ahead with the Libra project.
The most telling insight comes from the best tech company Microsoft who has raised the bar in terms of protecting their reputation on data and trust.
They decided to stay away from financial products like the black plague.
Better to stay in their lane than take wild shots that incur unneeded high risks.
When U.S. Senator Mark Warner, a Democrat on the Senate panel that oversees banking, was asked about Google and banking, he quipped, “There ought to be very strict scrutiny.”
Big tech is now on the verge of getting ferociously regulated and that could turn out positive for the big American banks, PayPal (PYPL), Visa (V), Mastercard (MA) and Square (SQ).
I heavily doubt that Google will turn Cache into a meaningful business unless Google offers some jaw-dropping interest rates or elevated points to move the needle.
Google has canceled weekly all-hands meetings because of the tension between staff members and Facebook is also just as dysfunctional at the employee level.
Whoever said it's easy to manage a high-stake, too-big-to-fail tech firm?
Even with all the negativity, Google is still a cash cow and if regulatory headwinds are 2-3 years off, they are a buy and hold until they are not.
The recent tech rally, after the rotation to value, has seen investors flood into Apple, Microsoft, and Google as de-facto safe haven tech plays.
Mad Hedge Technology Letter
January 2, 2019
Fiat Lux
Featured Trade:
(THE FANGS' PATH TO ONLINE BANKING),
(SQ), (V), (MA), (AXP), (JPM)
Yu'e Bao or "leftover treasure" in English has caught the attention of more than 400 million Chinese investors.
This money market fund has exponentially grown into a $250 billion fund by the end of 2017, and is now the largest money market fund in the world!
This product isn't offered by Bank of China or another giant state-owned bank or financial enterprise, but Alibaba's (BABA) Ant Financial (gotta love those Chinese names).
Assets under management are up 100% YOY and it now accounts for a quarter of China's money-market mutual fund industry in just one fund.
These inflows coincide with the sudden migration into mobile payments. Common folks are comfortable with investing their life savings in these short-term instruments with a too-big-to-fail, larger-than-life firm such as Alibaba.
Yu'e Bao derives its funds from Alipay users, Alibaba's digital third-party platform, that allows consumers to pay for everything in life from theater tickets to utility bills.
Service is unified on a holistic graphic interface. Users can easily divert cash into this fund with a few screen taps on their app. Yu'e Bao's ROI offers a seven-day annualized yield of 4.02%, down from the introductory annualized rate of 6.9% around the launch in 2013.
Yu'e Bao's short-term yield outmuscles the 1.5% interest rate on one-year Chinese bank deposits and the 3.6% yield on 10-year Chinese government debt.
Weak banking regulation has spawned a mammoth FinTech (financial technology) industry in the Middle Kingdom. Only one yuan (16 cents) is enough to create an account and considerable retail flow has rushed in.
China has catapulted ahead of the rest of the world emerging as the leader of global FinTech innovation. The pace, sophistication, and scale of development of China's FinTech have surpassed the level in any other of the developed countries.
The country's digital metamorphosis has enhanced e-commerce, payment systems, and connected logistical services. The Chinese discretionary spender for the past decade has been the deepest and most reliable lever of global growth.
Mobile third-party payments in China, 90% cornered by Tencent's WeChat and Alibaba's Alipay, are estimated to reach a lofty $6 trillion in revenue by 2019, more than 50 times that of the U.S.
These omnipresent payment systems are now deeply embedded into the fabric of Chinese society. It's common to witness homeless people on Shanghai subways waving around a scannable image for WeChat or Alipay money transfers instead of asking for physical cash.
Even in rural farmlands, shabby convenience stores prioritize digital currency and sometimes don't accept paper currency at all. Yes, China is beating the U.S. to a cashless society.
Digitization is changing the competitive balance, and global banks must embrace large-scale disruption caused by big tech platforms.
Banks in China regard these companies as potential collaborators resulting in a net positive long-term infusion of enhanced products and services.
Agreements have been forged between the Bank of China and Tencent, and the China Construction Bank has linked up with Alibaba.
China has incorporated the technical power of A.I. (artificial intelligence) and machine learning into its FinTech platforms at every opportunity. Robo-advisors are also making inroads creating a bespoke financial program for the individual.
This trend has so far failed to go viral in America where individuals still prefer plastic cards or even paper cash. E-commerce clocked in a paltry 9.1% of total U.S. retail sales in the third quarter of 2017.
Even though most of us have our heads buried deep in our smartphone virtual world, Americans are still programmed to whip out debit or credit cards at every opportunity.
Chinese who visit America carp endlessly about America's archaic payment system.
Ultimately, American payment systems are ripe for digital disruption.
The American consumer will ultimately cause severe damage to MasterCard (MA), Visa (V), and American Express (AXP) which are happy with the current status quo.
The lack of innovation in the US FinTech sector is a failure in the otherwise fabulous technological leadership of the US. American smartphones should already be a fertile digital wallet, not just a niche market.
Savvy Jack Dorsey even invented a firm based on this inefficiency exploiting the lack of proficiency in domestic FinTech with Square (SQ).
And a vital reason the stock has gone parabolic this year is because of the brisk execution and the long runway ahead in this industry.
American big tech will gradually utilize China's FinTech model and extrapolate it with "American personality." It is much more of a two-way street now than before with cutting-edge ideas flowing both ways.
The next leg up after digital wallet penetration of FinTech is money market funds on tech platforms. In effect, the Chinese innovation of this industry has allowed more variations of potential financing for the ambitious Chinese, and the same trends will gradually appear on Yankee shores.
Ironically enough, Amazon's (AMZN) land grab strategy is more prevalent in China as artificially low financing and juicier scale justify this strategy.
The scaling premium also explains why corporate China's early adopter advantage is so effective because not many countries boast a 1.3-billion-person consumer market.
Soon, Americans will wake up to the reality that American FinTech must advance or foreign firms will rush in.
Mediocrity is not good enough.
iPhones and Android consumers could direct savings into tech money market funds with compounding yield all on a single digital platform.
Tech companies could deploy some of the repatriated cash to invest in some fledgling FinTech expertise to smoothly execute this new endeavor.
Consequently, a successfully created money market fund on a tech platform would enlarge the already substantial cash hoard these firms possess. Not only will the large tech companies flourish, but the big will get absolutely massive.
The determining factor is financial regulation. Capitol Hill has drawn a large swath of mighty Silicon Valley tech titans to testify because they are stepping on too many toes lately.
A scheme to hijack the digital payments market and dominate the mutual fund industry will cause unyielding push back in Washington especially when the Amazon death star continues pillaging select industries of their choosing and eliminating brick-and-mortar jobs by the millions.
J.P. Morgan (JPM) which has the largest institutional money market fund in the country and retail stalwarts such as BlackRock and Vanguard will be sweating profusely too if mega tech starts probing around its turf.
Alibaba is also coming for its bacon with the failed purchase of payment transfer service MoneyGram International (MGI) temporarily shutting out Jack Ma from a foothold in the American payment system industry.
And if the Chinese aren't let in, there will be others sniffing around for the bacon, too.
The momentum for these financial instruments is robust as FinTech integrates deeper into consumer life. The global cash glut from a decade of cheap financing is causing profit-hungry investors to starve for high-yield vehicles.
The stability and clean balance sheets of tech giants give them ample chance to successfully execute. So, why can't they also become banks? Would you buy an Apple, Amazon, or Google money market fund if they offered a 4% to 7% annualized yield?
I believe most Americans would.
Mad Hedge Technology Letter
October 3, 2018
Fiat Lux
Featured Trade:
(OUR HOME RUN ON SQUARE),
(SQ), (V), (AMZN), (GRUB), (SPOT), (MSFT), (CRM), (AAPL)
Pat yourself on the back if you pulled the trigger on Square (SQ) when I told you so because the stock has just lurched over an intra-day level of $100.
It was me aggressively pushing readers into buying this gem of a fin-tech company at $49. To read that story, please click here (you must be logged in to www.madhedgefundtrader.com).
Since then, the price action has defied gravity levitating higher each passing day immune to any ill-effects.
The Teflon-like momentum boils down to the company being at the cross-section of an American fin-tech renaissance and spewing out supremely innovative products.
At first, Square nurtured the business by targeting the low hanging fruit– small and medium size enterprises in dire need of a strong injection of fin-tech infrastructure.
It largely stayed away from the big corporations that adorn billboards across the Manhattan skyline.
That was then, and this is now.
Square is going after the Goliath’s fueling a violent rise in gross payment volume (GPV).
Modifying themselves for larger institutions is the next leg up for Square.
They recently inaugurated Square for Restaurants for larger full-service restaurants.
Business owners do not need technical backgrounds to operate the software and integrating Caviar into this program emphasizes the feed through all of Square’s software.
Dorsey has built an ecosystem that has morphed into a one-stop shop for comprehensively running a business.
Migrating into business with the premium corporations offers an opportunity to augment higher margin business.
This is the lucrative path ahead for Square and why investors are festively lining up at the door to get a piece of the action.
The downside with an uber-growth company like Square are lean profits, but they have managed to eke out three straight quarters of marginal spoils.
However, the absence of profits can be stomached considering the total addressable market is up to $350 billion.
Grabbing a chunk of that would mean profits galore for this too hot to handle company.
Expenses are always a head spinner for Silicon Valley firms and attracting a dazzling array of engineers to spin out breathtaking profits can’t be done on the cheap.
The Cash app download figures are sizzling and is one of the most popular apps in the app store.
Square’s marketing strategy is also turning a corner getting out their name leading to sale conversions.
These are just several irons in the fire.
The last two years has seen this stock double each year, could we be in for another double next year?
If measured by growth, then I see why not.
Growth is the ultimate acid test deciding whether this stock will be dragged down into the quick sand or let loose to run riot.
Other second-tier tech firms in the middle of a sweet growth spot pack a potent punch like Spotify (SPOT) and Grubhub (GRUB) which are growing annual sales around 50-60%.
Material profits are also irrelevant for the aforementioned tech juggernauts.
Square is expanding at the same fervent pace too, and the hyper-growth only makes payment processors like Visa (V) quasi-jealous of such staggering numbers.
And when Square trots out numbers to the public like that with (GPV) shooting out the roof, the stock does nothing but go gangbusters.
Either way, Square has popularized making credit card payments through smartphones and that in itself was a tough nut to crack amongst tough nuts.
Square also has a line-up of impressive point-of-sales products such as Caviar.
In fact, merchant sellers are adopting an average of 3.4 Square software apps with invoices, loans, marketing, and payroll software being the most beloved.
Square also offers other software that can handle back office tasks and manage inventory.
The software and services business is on pace to register over $1 billion in sales in 2019.
The breadth of functions that can boost a company’s execution highlights the quality of software Dorsey has produced.
I always revert back to one key ingredient that all tech companies must wildly indulge in to fire up the stock price – innovation.
Innovation in bucket loads is something all the brilliant tech firms crave such as Microsoft (MSFT), Amazon, and Salesforce (CRM).
Overperformance starts from the top and trickles down to the people they hand pick to manage and run the businesses.
Jack Dorsey is right up there with the best of them and his influence cannot be denied or ignored.
His stewardship over his other company Twitter (TWTR) is sometimes worrisome because of a pure scheduling conflict, but it’s obvious which company is having a better year.
Square steers clear of the privacy and regulatory minefields handcuffing Twitter.
And it could be safely assumed that Dorsey enjoys his afternoons more at Square than his mornings across the street at Twitter where he is bombarded by heinous problems up the wazoo.
When you conjure up an up-and-coming company that could rattle the establishment, Square is one of the first companies that comes to mind.
Some analysts even argue this company deserves to be lifted into the vaunted Fang group.
I would say they are on their merry way but they just aren’t big enough to command a spot on the Fang roster.
I have immense conviction this stock will be a deep influencer of our time, and its diversified software offerings add limitless dimensions underpinning massive revenue streams.
In Q2, the subscription revenue grew 127% YOY underscoring the success the software team is having, crafting productive apps applicable to business owners.
Business owners can even take out a loan through Square Capital which issues micro-loans to small business owners.
In need of financing? Ring up Dorsey’s company for a few quid.
Starkly contrasting Square in the payment processors space is Visa (V).
Visa is not a hyper-growth company going ballistic, but a stoic behemoth unperturbed.
The 3.283 billion visa cards that adorn its insignia represents scintillating brand awareness and efficiency.
When Tim Cook was asked if Apple (AAPL) plans to disrupt Visa, he smirked and said, “People love their credit cards.”
This is a prototypical steady as she goes-type of company.
They do not offer micro-loans to small businesses or dabble with any of the murky sort of products that can be found on the edge of the risk curve.
They are a safe and steady pure payment processor.
Its network can digest 65,000 transactions per second and is universally cherished as a brand around the world.
All of this led to an operating margin of 66% in 2017.
Square has identified other parts of the payment process to snatch and do not directly compete with Visa.
They partner with Visa and pay them a processing fee.
Subsequently, Square is paid a merchant fee after the payment is approved.
Visa has a monopoly and a moat around their business as wide as can be.
Square is a different type of beast – growing uncontrollably and hell-bent on spawning a revolutionary fin-tech paradigm shift.
The question is can Square eventually turn payment heavyweights like Visa on its head?
The path is fraught with booby traps and as Square generates the projected sales and bolsters its revenue, it could start to encroach on these legacy processors too.
Yet, it’s too early to delve into that threat yet.
Enjoy the ride with Square and better to lay off this potent stock until a better entry point presents itself.
This stock will go higher. Giddy-up!
Mad Hedge Technology Letter
July 13, 2018
Fiat Lux
Featured Trade:
(THE FANGS' PATH TO ONLINE BANKING),
(SQ), (V), (MA), (AXP), (JPM)
I remember that the highlight of my 1968 trip to Europe was always my visit to the nearest American Express (AXP) office to pick up my mail.
In those pre Internet and email days, it was the only way that a fresh faced 16 year old could stay in touch with a hand wringing family while traveling around the world.
They just wrote ?John Thomas, c/o American Express, Paris, France,? and the letters never failed to get through to me.
It was also a great place to meet other vagabonding Americans my age--of the female persuasion. At least they spoke English. Almost.
That was a very long time ago.
So I got to know well the American Express locations off the Spanish Steps in Rome, Saint Mark?s Square in Venice, Berlin?s Kurfurstendamm, and the Champs-Elysees in Paris.
I have a feeling that American Express is about to give me a warm and fuzzy feeling once again.
After being taken out to the woodshed and getting beaten senseless in the wake of getting fired by Costco, one of the biggest customers, the shares appear poised for a comeback.
We have a rare occasion where the highest quality stock in a sector with the best business model is selling cheaper than its cohorts for a series of temporary reasons.
Take a look at the charts for (AXP) and Visa (V) below, and one of the greatest pairs trades of all time may be setting up, whereby you want to buy for the former and sell short the latter against it.
At the very least, you should be taking your monster profits on Visa and rolling the money into American Express.
Since its inception in 1958, that flashy green (or platinum) piece of plastic has long been a status symbol, and owned the premium end of the credit card market.
As a result, it earns more fees and extends fewer loans than its competitors. The loans it does have enjoy a far lower default rate. There are now 107 million Amex cards in circulation, compared to only 55 million in 2001. Thank you 1%!
American Express cardholders run balances three times larger than the average Master Card holder. That?s what happens when you buy a Ferrari on your Amex card, as I once did (to get the frequent flier points).
Merchants pay very high fees, usually 5% of the purchase. That?s why many shun the card. (AXP) is currently running a credit card balance of $940 billion, versus $3.1 trillion for Visa (V).
Fees accounted for an impressive 57% of the company?s revenues, a far higher ratio than other credit card companies. Better yet, (AXP)?s fees are rising, while those of others are falling. Interest on balances brings in 15% and cardholder fees 8%.
(AXP) is expected to earn $5.8 billion in net income on $33.9 billion in revenues this year, up 9.4%. With the US economy recovering, growing by 2.6% this year and 3.0% plus in 2015, the company is in the sweet spot for capturing more profits.
Morgan Stanley estimates that cardholder spending grows at 4.5 times the US GDP growth rate. That should cause (AXP)?s earnings to double, and the stock as well. An extra tailwind will be the company?s new strategy of moving down market to expand market share.
Despite all this good news, (AXP) shares are selling at a 13.4X multiple, a discount to its industry (21X), and the main market (18X). An ambitious share buy back program should put a floor under the stock.
Part of the discount can be explained by a Justice Department suit claiming that the company overcharges merchants. Amex correctly argues that, as the smallest of the major credit card companies, it has nowhere near monopoly pricing power.
It will be interesting to see how aggressively the government pursues its action, now that attorney general Eric Holder, has moved on to retirement.
You all know by now that I think financials are the place to be for years going forward because of imminently rising interest rates. But I?ll hold back on pulling the trigger on single name long side stocks plays until the carnage in the markets abate.
When I?m ready to shoot out a Trade Alert, you?ll be the first to know.
When I do, don't even think about putting it on your credit card.
