Podcast Summary
The dominance of Visa and Mastercard in the payments industry: Visa and Mastercard remain essential players in the payments ecosystem, despite competition from cryptocurrencies and Web 3.0. They offer similar services and are important investments for those capitalizing on digital transactions.
Visa and Mastercard, despite some speculation about the future of cashless transactions and the potential impact of cryptocurrencies and Web 3.0, are not going anywhere. These two companies, which rule the roost in the payments industry, are similar in many ways and can be considered a Lowe's and Home Depot situation. Though one is larger than the other, they offer similar services and are essential players in the payments ecosystem. The War on Cash basket, which includes Visa, Mastercard, PayPal, and Block, is still outperforming the market, even with recent pullbacks in some of these companies. Overall, these tollbooths of the payments industry continue to be important investments for those looking to capitalize on the shift towards digital transactions.
Visa and Mastercard: Essential Parts of the Payments Value Chain: Visa and Mastercard remain dominant players in the payments industry despite competition from fintechs and crypto firms. They benefit from the success of these new companies and have opportunities for growth in undermonetized areas.
Visa and Mastercard, with their massive payment networks and enormous annualized payment volumes of $22 trillion between them, are essential parts of the payments value chain. Despite the emergence of fintech companies, crypto firms, and other new players, these two companies are not going anywhere. In fact, they benefit from the success of these new companies because their logos are on many of their products. While there are other players in the market, such as American Express and Discover in the US, and Visa and Mastercard are not the dominant players in all markets, they are still very profitable businesses with high net margins. There are opportunities for growth, particularly in areas like person-to-person transfers and business-to-business payments, which are not yet monetized effectively. These companies are not a complete duopoly, but their rails are an inexorable part of the payments ecosystem.
War on Cash Basket's Outperformance: The 'War on Cash' basket, consisting of Mastercard, Visa, PayPal, Block, and equal weightings, has outperformed the market by 23% since 2017, with PayPal contributing despite challenges and shifting focus to monetization.
The war on cash basket consisting of Mastercard, Visa, PayPal, Block, and equal weightings has significantly outperformed the market since its inception in 2017, with a return of 130% versus the market's 105%. Despite recent pullbacks, companies like PayPal are still contributing to the basket's outperformance. PayPal, in particular, has faced challenges with its disjointed growth strategy and ambitious growth targets that have since been revised. The company's attempt to become a "super app" through the acquisition of Pinterest didn't resonate with consumers, and some acquisitions, like Honey, raised questions about overpaying during the high valuation environment. PayPal's focus has shifted from aggressive user growth to maximizing value from its current user base, with Venmo being a key area for potential monetization. The stock price may not reflect the company's ongoing growth.
PayPal's Focus on Current Users Boosts Growth: PayPal's profitability, 15% payment volume growth, 12% expense decrease, and 13% transaction increase demonstrate a strong business model, solid financial position, and undervalued market perception.
PayPal is focusing on engaging its current user base more effectively, resulting in increased transactions and revenue growth. Despite a declining user base, the company's total payment volume has risen by 15% year over year, outpacing inflation. Nontransaction expenses have decreased by 12% despite higher payment volume, leading to a 20% earnings per share growth. The average active PayPal account makes 56.6 transactions per quarter, a 13% increase from a year ago. PayPal is a profitable business with a cash machine-like operation, generating over $5 billion in free cash flow annually, which they are currently using for share buybacks. With a large cash balance sheet and a cheap valuation, PayPal appears to be undervalued by the market. The company is in a strong financial position, playing into market tailwinds, and is focusing on maximizing its current business before considering further capital allocation through acquisitions. The recent leadership change may indicate a shift towards this strategy, which could benefit the company. Despite the occasional growing pains, PayPal's fundamentals remain solid.
Block's Expensive Acquisitions Raise Questions: Despite criticism, Block continues to expand through acquisitions. The recent focus is on cost control and reducing workforce, indicating a shift towards stability after some questionable moves.
Block, formerly known as Square, has been expanding its business through various acquisitions, some of which raised questions about focus. The acquisition of Tidal, Jay-Z's music streaming service, seemed unrelated to Block's core business and was criticized for being expensive. However, the acquisition of Afterpay, a buy now, pay later service, was seen as a better fit. Jack Dorsey, Block's co-founder and CEO, has been known for his growth-at-all-costs approach, but recently, the company has been focusing on controlling costs and reducing its workforce. Block's business is still growing rapidly, with gross profit up 21% year over year in the last quarter. The recent focus on cost control and the lack of news from Block compared to PayPal suggest that the company is trying to get back on track after some questionable moves.
Cash App's Growth and Investments in Buy Now, Pay Later Options: Cash App, though growing, is currently the least profitable due to heavy investments in Buy Now, Pay Later integration. The payments ecosystem, specifically BNPL, is expanding rapidly, making Marketa's acquisition a potentially profitable move for Block.
Cash App, despite its continued growth and the added value from the Afterpay integration, is currently the least profitable of the four companies discussed due to heavy investments in growth. The payments ecosystem, specifically Buy Now, Pay Later options like Afterpay, is growing significantly, with consumers and retailers increasingly adopting these services. Block, Cash App's parent company, is a major player in this market, making Marketa, a payment card infrastructure provider, a significant contributor to their revenue. While Block's acquisition of Marketa could have been an expensive investment, the growing market for Buy Now, Pay Later options may eventually offset these costs. Overall, the payments industry is evolving, and companies that can adapt and capitalize on these trends will likely see success.
Cash App renews Marqeta partnership, reassuring investors: Despite initial revenue decline, Cash App's partnership with Marqeta remains strong, with payment volume up 33% YoY and Marqeta on the brink of profitability.
The renewed contract between Cash App and Marqeta, which secures the partnership through 2028, brought relief to investors despite an initial revenue decline due to lower rates. This decline, however, does not fully represent the business's growth, as payment volume through Marqeta's platform has increased by 33% year over year. With a high gross margin of 67% and over $1.3 billion in cash, Marqeta is on the verge of profitability and poised to grow further as a leader in embedded finance. Another company, Shift4 Payments, specializes in payment processing and software for businesses, particularly in the restaurant and hotel industries. With a market cap of over $5 billion and a profitable net profit margin, Shift4 Payments is a successful business experiencing strong growth, with payment processing volumes increasing by 36% year over year.
Two Fintech Giants: Shift4 and MercadoLibre: Shift4, focusing on restaurants, hotels, and sports venues, experienced a 48% annualized growth rate and acquired Appetize. MercadoLibre, with a marketplace and payment solution, saw a 60% increase in e-commerce merchandise volume and over 120% growth in payment volume, despite inflation, and both are profitable.
Shift4 and MercadoLibre are two powerful fintech companies experiencing significant growth in various industries and verticals. Shift4, with a focus on restaurants, hotels, stadiums, and nonprofits, has seen a 48% annualized growth rate over the past five years, including a recent acquisition of Appetize to expand into sports venues. MercadoLibre, known for its marketplace, is also a fintech play with a growing ecosystem, profitability, and impressive numbers on both its e-commerce platform and payment side, MercadoPago. The e-commerce merchandise volume is up almost 60% year over year, and total payment volume is up over 120%, despite high inflation in some countries. Both companies have strong credit businesses and are profitable, with MercadoLibre recently hitting a 52-week high. These companies' growth and success can be compared to early-stage Amazon and PayPal.
Stock discussions provide insights but require caution: Listen to stock discussions for insights, but always do your own research or consult with a financial advisor before making investment decisions, as past performance doesn't guarantee future results.
While listening to stock discussions, such as those on The Motley Fool, can provide valuable insights, it's crucial to remember that the speakers may have personal interests and The Motley Fool may have formal recommendations. Therefore, decisions to buy or sell stocks should not be based solely on this information. Always do your own research or consult with a financial advisor before making investment decisions. Additionally, it's important to keep in mind that the stock market is subject to various risks and uncertainties, and past performance is not indicative of future results. So, stay informed, but make decisions wisely.
