💰 Cathie Wood Bets BIG on SQ & PYPL Stocks Disrupting Banks

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banks are so
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so
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i mean people go i'm going to short test
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like why don't you short the bank how
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many times do you have to get your face
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ripped off to realize you're just an
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idiot go short a bank if we learned
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anything from 2008 it's that big banks
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can be too big to fail or at least too
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big to go quietly that clip from
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chamonth is from the end of october of
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2020 and since then jp morgan chase
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citigroup bank of america and charles
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schwab are all up 50 to 100
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so if you took him at his word and
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shorted big banks after hearing that
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clip you probably lost your shirt and
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then some but the world is changing and
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big banks will eventually need to change
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with it so in this episode i'll be
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comparing two companies that are leading
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that change both square and paypal are
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trading at steep discounts today and
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could disrupt legacy banks over the long
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term that's why arkanvest holds both of
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these companies and has been
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aggressively buying the dip on one of
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them but now with interest rates on the
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rise are these fintech companies worth
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investing in or will the biggest banks
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just keep getting bigger your time is
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valuable so let's get right into it big
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banks with physical branches do have
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real benefits you can walk into a bank
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and talk to somebody for basically any
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type of normal finance related need like
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banking borrowing lending investing and
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financial advisory services many people
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want to talk to a real person who they
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feel will help them sort out their own
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personal finances which is why brick and
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mortar banks are often the financial
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hubs of the communities they serve
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before the information age the physical
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bank branch model made all the sense in
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the world so big banks bought up the
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biggest nicest buildings in the best
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parts of town another thing that was
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true in the late 80s and early 90s is
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that annual returns on savings accounts
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were north of eight percent eight
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percent this is why i think a lot of our
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parents try to teach us the importance
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of savings accounts today high yield
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savings accounts have yields of about
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half a percent all the way to one
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percent still far below inflation so big
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banks really did kick ass back in the
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day but now not so much in a mostly
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online and post-pandemic world these big
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bank branches have turned from assets
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into liabilities rents and leases are
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high and foot traffic is low so these
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buildings give banks a lot less bang for
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their buck the average annual cost per
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active bank branch hit a record high of
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over half a million dollars a year in
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2018 and banks like jp morgan bank of
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america and wells fargo have many
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thousands of these bank branches around
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the world and tens of thousands more
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atms on top of that this is serious
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physical infrastructure that costs money
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to lease maintain power and so on foot
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traffic at bank branches is down because
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the in-bank experience is filled with a
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lot of friction driving there waiting in
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line dealing with other people filling
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out forms having to put on pants
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probably not in that order on top of
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that the financial experience at big
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banks also comes with a lot of friction
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late fees atm fees high interest rates
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on loans account minimums to open and
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fees if you want to close and my
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personal favorite non-sufficient funds
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fees that's where you get charged money
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for uh not having enough money the
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reasons big banks have to do this are
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simple they need to cover the costs of
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their big buildings networks of atm
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machines and everything else that used
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to help them acquire customers in an
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offline world if we take all the costs
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of running these big banks and divide it
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by the number of customers they're
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acquiring we get their customer
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acquisition costs according to arc
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invest research those costs were roughly
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925 dollars per customer in 2019. this
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means a couple of things to us investors
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first it means that for the same size
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checking account or whichever financial
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product you want to compare banks net a
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much lower amount than digitally native
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companies said another way banks need
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people to deposit or borrow much more
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money than digital wallets to break even
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for example these customer acquisition
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costs mean that big banks don't break
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even on a checking account until it's at
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about 6 500
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in 2020 surveys suggested that the
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median savings account balance in the
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united states was just 3 500 meaning the
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average bank would actually lose around
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three hundred dollars on that account
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over its lifetime even if you add
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another two thousand dollars to that
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number which is the median emergency
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fund in the united states a big bank
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would still lose around one hundred
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dollars on that client's accounts put
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together so arkhanvest's math shows that
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the average big bank loses money on
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banking the average american my sincere
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hope is that big banks continue to close
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their worst performing bank branches and
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shed these costs over time after all
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those costs are getting passed on to us
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doing that would move this blue line
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upward to the purple line this is a
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totally different story for digital
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wallets because their customer
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acquisition costs are so low due to them
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not having any networks of bank branches
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or physical atm machines and so on this
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means two things for digital wallets
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first they make about seven hundred
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dollars on the median checking and
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emergency account total of fifty five
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hundred dollars second they actually
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break even on an initial account balance
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of just 150
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meaning they can start serving people
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who are unbanked or underbanked today in
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2020 the fdic found that over six
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percent of households or 14 million
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americans are unbanked that's a lot of
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potential clients for digital wallets
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that legacy banks simply can't go after
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add to that how quick streamlined and
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personalized these services can become
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when they're handled by artificial
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intelligence and you get a real recipe
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for disruption of the way big banks are
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working today i'm not telling you to go
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short big banks but i am telling you
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that big banks will need to start
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looking at least a little more like
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digital wallet companies in the future
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if they want to stay competitive this is
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why i think digital wallet companies are
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worth talking about right now even
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though traditional banking stocks are
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way up and fintech stocks are way down
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so with that context on how digital
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wallets could disrupt these big banks
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let's take a serious look at the big two
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square and paypal for the rest of this
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episode i'll be using square and block
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interchangeably since some of my sources
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are from before square changed its name
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arc invest published a lot of research
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comparing squares cash app to paypal's
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venmo in their research they showed that
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digital wallets in the us can provide up
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to an 800 billion dollar market
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opportunity they also do some clever
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research using google trends to show the
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rising adoption of cash app versus venmo
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but there's much more to these companies
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than their digital wallet offerings
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here's an interesting difference in
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kathy woods trading activity between
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them kathy wood has been actively buying
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the dip on block as its price got cut
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literally in half over the past three
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months her average buy price over the
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last month is a little over 150 dollars
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per share and block stock is around 15
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percent lower than her average buy price
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today square or now block is arc
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invest's ninth biggest position overall
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with over three quarters of a billion
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dollars in it across rk arc f and arc w
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arc invests fund themed around the next
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generation of internet applications on
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the other hand paypal is arkhamvest's
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97th biggest position it's only in arcf
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and kathy wood has been selling out of
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it her average buy price over the last
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month for paypal is a little under 190
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dollars per share and it's trading about
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10 percent lower than that right now so
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even though these are both digitally
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native fintech companies that could
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disrupt different areas of legacy
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banking comparing them may not be as
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apples to apples as i thought when i
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started my research for this episode
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this is something i feel investors
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actually don't talk about enough so let
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me make a quick point here zoom versus
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microsoft is a bad comparison to make
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because an investor cannot buy team
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stock when you buy microsoft stock only
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a very tiny fraction of that stock is
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represented by microsoft teams think
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about all the other things you're
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investing in when you buy microsoft
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stock windows xbox microsoft office and
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azure the list goes on and on microsoft
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is a great stock but if you're looking
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for a pure play internet-based
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communications company microsoft stock
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isn't it so while it's fair to compare
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zoom to teams you can't compare zoom
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stock to microsoft stock those
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businesses do incredibly different
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things in my understanding this is why
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arkanvest holds zoom but not microsoft
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roku but not amazon pound here but not
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google watch out for these faulty
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comparisons because in all of these
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cases i just mentioned you might want to
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hold both stocks instead of choosing one
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over the other let me show you just how
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different these two companies are square
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is focused on building two interacting
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ecosystems one for sellers and one for
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individuals as buyers the seller
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ecosystem focuses on a few key areas
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managing in-person and online payments
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providing sale solutions and business
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tools financial services including
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credit payroll and loans and a platform
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for third parties to develop new tools
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integrations and vertical specific
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software for different kinds of
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businesses from a technology point of
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view there are two things about square
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that really stand out to me first
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they're vertically integrated meaning
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their hardware software services and
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data are all built and maintained by
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them instead of outsourced to outside
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vendors that's important because they
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have tight control over product
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development and the user experience at
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every level the second thing is that
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they do automated risk assessments using
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machine learning and maintain high
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acceptance rates this is actually really
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tricky because a small error in these
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algorithms can result in providing a lot
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of non-performing loans or lines of
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credit i made a few videos about stone
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stock ticker symbol st e where we saw
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just how massive of an impact getting
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these risk assessments wrong can have on
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the bottom line of a company square
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being able to automatically approve a
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high amount of these loans with fair
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rates while keeping their risks in check
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is a pretty big deal and requires
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mountains and mountains of data another
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smart thing that square did was acquire
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after pay one of the biggest names in
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the buy now pay later space they
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announced the 29 billion deal last
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august and it's expected to close soon
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in the first quarter of 2022 so square
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is focused on building deep feature-rich
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solutions for individuals and
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micro-merchants small and medium-sized
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businesses and then move upstream to the
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mid-market that's who this ecosystem is
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for smaller sellers let me just mention
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one thing about cash app which is
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square's digital wallet and their
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ecosystem for individual buyers remember
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the 925 dollar customer acquisition
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costs for big banks that i mentioned
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earlier cash app's customer acquisition
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costs for q3 of 2021 was just five
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dollars so while it takes an average big
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bank well over five years to break even
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on a typical account cash app gets a
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positive return on their customer
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acquisition costs within the first year
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often much sooner than that that's a
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pretty big difference right okay where
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square is more of a business solutions
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ecosystem paypal is more of a payments
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processor and independent payment
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gateway customers can connect through
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and pay using paypal just about anywhere
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including internationally since paypal
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can handle currency exchanges just like
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square did with afterpay paypal acquired
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paydee a two-sided payments platform and
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provider of buy now pay later solutions
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in japan for 2.7 billion dollars or
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about 10 times less than square's
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acquisition of afterpay paypal has lots
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of integration with other apps making
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them a great backup payment method that
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almost every kind of business can accept
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larger sellers tend to prefer paypal
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because they have lower transaction fees
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than square which makes more of a
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difference the more transaction volume a
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business has keep that in mind when i
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show you their financials paypal is
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focusing on payment solutions for the
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broadest number of users and has a wider
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global reach than square venmo paypal's
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digital wallet is more limited than
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squares cash app but it has features
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like discovering deals accessing lines
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of credit buying crypto buy now pay
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later features and so on venmo is
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getting integrated with amazon which is
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greatly going to increase their total
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payments volume through the app in 2022
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and beyond at the same time amazon is
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stopping accepting visa credit cards
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issued in the uk this week due to a
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face-off over transaction fees now
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amazon is taking steps like offering uk
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customers a gift card to switch their
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payment methods away from visa and is
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also reviewing the amazon visa credit
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card here in the usa these things should
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clearly have a big impact on visa's
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stock so it is possible for giant legacy
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finance companies to get disrupted like
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this over time this is a visa we're
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talking about here anyway the trend here
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is that square is a deeper ecosystem of
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offerings for a narrower audience while
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paypal is a suite of payments processing
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solutions for a global audience this
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could be why square can be found in arc
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w and rk while paypal is only found in
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arcf let me move on to highlighting
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their financials and telling you which
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one i'd buy right now square is
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currently trading at less than half of
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its all-time high at a price to sales
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ratio of well under four square has a
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gross payment volume of about 41 billion
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dollars for quarter three of 2021.
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square's revenue was about 3.8 billion
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dollars which grew about 27 percent year
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over year their gross profit was about
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1.1 billion dollars that's a gross
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margin of about 29
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their operating income was 23 million
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dollars million not billion giving them
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an operating margin of 0.6 percent their
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net income was a loss of 2.9 million
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dollars so they were just barely
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unprofitable for the quarter this is the
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kind of company that kathy wood really
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focuses on since they sacrifice profits
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today and reinvest all of their cash
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into good healthy growth and we know
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it's good healthy growth because their
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customer acquisition costs are so low we
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know they're not spending money on
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things like marketing and promotions to
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win new business they're spending that
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money on research development ramping up
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new offerings and acquisitions the
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challenge here is that companies with
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relatively low net earnings are the
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exact ones that suffer when interest
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rates rise which is what we're seeing
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right now in the market now let's talk
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about paypal paypal is trading at a 45
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discount relative to their all-time high
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at a price to sales ratio of about eight
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it seems like square is a better buy at
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first but that's a little misleading
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here's why for the same quarter paypal's
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total payment volume was 310 billion
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dollars almost eight times higher than
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squares their revenue was about 6.2
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billion dollars which is up about 13
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percent year over year so square is
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growing twice as fast but keep in mind
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that they're growing from a much smaller
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baseline of that about 3.6 billion
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dollars was gross profit for paypal or
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about 58 in terms of gross margins which
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is literally double squares that's why
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paypal should be trading at twice the
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price to sales ratio of square paypal
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also had a billion dollars of operating
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income which means their operating
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margins are almost 17
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they actually had a net income of 1.1
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billion dollars after including
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non-operating revenues like changes in
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exchange rates interests and so on which
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translates to a 17.6 profit margin so
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paypal is in a much safer financial
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situation today in an environment that
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punishes future risks comment below or
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tweet me at ticker symbol u with your
14:42
thoughts on fintech companies versus
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brick and mortar banks as well as square
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vs paypal do you think square's customer
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acquisition costs of just five dollars
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pose a big threat to big banks which pay
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over nine hundred dollars to acquire a
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similar customer what do you think about
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the financial health of paypal versus
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square now that we know interest rates
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are set to rise throughout the next
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couple years i read all my comments and
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tweets and i'm excited to hear your
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thoughts as for me here's exactly what i
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think will happen and how i'm playing it
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i've been thinking about this ever since
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i saw that clip of chamaf how many times
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do you have to get your face ripped off
15:15
to realize you're just an idiot go short
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a bank so i'm not going to short big
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banks but i am going to keep betting on
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digital wallets i think that brick and
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mortar banks are going to keep closing
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more and more physical branches and at
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the same time i think they're going to
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keep coming out with more and more
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fintech offerings like digital wallets
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stable coins payment gateways and
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frictionless solutions for peer-to-peer
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transfers what i'm saying is that banks
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are going to have to innovate to stay in
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the game which means they're going to
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have to look a lot more like square or
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paypal than they do today kind of like
15:45
how legacy automakers are going to have
15:47
to start looking more and more like
15:49
tesla if they want to stay relevant over
15:51
the next decade your next question is
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probably
15:54
okay so square or paypal after all this
15:56
research i really think that's the wrong
15:58
question to ask i've spent this whole
16:00
episode explaining just how different
16:01
these two companies are payment
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solutions versus business solutions a
16:05
focus on big companies versus small and
16:07
medium-sized businesses high future
16:09
growth versus today's stability and
16:11
profitability so i'm going to be
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investing in both of them i don't plan
16:15
on retiring anytime soon but the market
16:17
is favoring financial stability right
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now so for every 400 or so dollars i'm
16:21
gonna put into square i'm also going to
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put something like 100 into paypal to
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add a little more stability to my
16:28
investments in fintech if interest rates
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rise more than expected i'll start
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adding more and more to paypal if the
16:34
fed cools often keeps interest rates
16:35
lower than expected i'll add more to
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square these companies have a lot of
16:39
differences that make me happy to hold
16:41
both of them and i don't mind double
16:43
dipping where they overlap which is on
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digital wallets and frictionless
16:47
peer-to-peer transfers those are the
16:49
exact disruptive innovations that i
16:51
believe will force big banks to change
16:53
for the better or die trying and to me
16:56
that's a future worth investing in so
16:58
stay long stay strong and thanks for
17:00
watching until next time this is ticker
17:03
symbol u my name is alex reminding you
17:05
that the best investment you can make is
17:08
in you