Mentioned in Video:
- β οΈ Cathie Wood: Warning to Banks & Which Companies Will Disrupt Them (ARK Invest Big Ideas 2021) – https://www.youtube.com/watch?v=VV9YNg0eGVI
- ARK Invest White Paper: Cash App vs. Venmo – https://ark-invest.com/white-papers/cash-app-vs-venmo/
- Will Bank Branches Give Way to Digital Wallets? (ARK Invest) – https://ark-invest.com/articles/analyst-research/digital-wallets/
- Cash App Could Be the Fastest Growing Digital Wallet in the US (ARK Invest) – https://ark-invest.com/articles/analyst-research/cash-app-monthly-active-users/
- Digital Wallet Companies Can Bank the Unbanked, While Traditional Banks Cannot (ARK Invest) – https://ark-invest.com/articles/analyst-research/digital-wallet-companies/
- Square (#SQ Stock) Earnings Report – https://investors.block.xyz/events-and-presentations/default.aspx
- Paypal (#PYPL Stock) Earnings Report – https://investor.pypl.com/financials/quarterly-results/default.aspx
- Square (SQ) Acquires Afterpay for $29B – https://squareup.com/us/en/press/square-announces-plans-to-acquire-afterpay
- Paypal (PYPL) to Acquire Paidy for $2.7B – https://newsroom.paypal-corp.com/2021-09-07-PayPal-To-Acquire-Paidy
- Support the channel and get extra member-only benefits by joining us on Patreon: https://www.patreon.com/tickersymbolyou
π° #CathieWood is betting big on Square and Paypal disrupting traditional banks. Thatβs why #ARKInvest holds Square stock (SQ) in #ARKK, #ARKW, and #ARKF. But why does @ARK Invest only have a small position in Paypal (PYPL stock) and why only in one fund? Are these stocks much more different than investors think? Letβs compare both stocks to legacy banks and then each other to see if either are among the best stocks to buy now.
Video Transcript:
00:00
banks are so
00:01
so
00:02
i mean people go i'm going to short test
00:04
like why don't you short the bank how
00:06
many times do you have to get your face
00:07
ripped off to realize you're just an
00:09
idiot go short a bank if we learned
00:11
anything from 2008 it's that big banks
00:13
can be too big to fail or at least too
00:15
big to go quietly that clip from
00:17
chamonth is from the end of october of
00:19
2020 and since then jp morgan chase
00:22
citigroup bank of america and charles
00:24
schwab are all up 50 to 100
00:27
so if you took him at his word and
00:28
shorted big banks after hearing that
00:30
clip you probably lost your shirt and
00:32
then some but the world is changing and
00:35
big banks will eventually need to change
00:36
with it so in this episode i'll be
00:39
comparing two companies that are leading
00:40
that change both square and paypal are
00:43
trading at steep discounts today and
00:45
could disrupt legacy banks over the long
00:47
term that's why arkanvest holds both of
00:49
these companies and has been
00:50
aggressively buying the dip on one of
00:52
them but now with interest rates on the
00:54
rise are these fintech companies worth
00:56
investing in or will the biggest banks
00:58
just keep getting bigger your time is
01:01
valuable so let's get right into it big
01:03
banks with physical branches do have
01:05
real benefits you can walk into a bank
01:07
and talk to somebody for basically any
01:09
type of normal finance related need like
01:12
banking borrowing lending investing and
01:15
financial advisory services many people
01:17
want to talk to a real person who they
01:19
feel will help them sort out their own
01:21
personal finances which is why brick and
01:23
mortar banks are often the financial
01:24
hubs of the communities they serve
01:27
before the information age the physical
01:28
bank branch model made all the sense in
01:30
the world so big banks bought up the
01:32
biggest nicest buildings in the best
01:34
parts of town another thing that was
01:36
true in the late 80s and early 90s is
01:38
that annual returns on savings accounts
01:40
were north of eight percent eight
01:43
percent this is why i think a lot of our
01:45
parents try to teach us the importance
01:47
of savings accounts today high yield
01:49
savings accounts have yields of about
01:51
half a percent all the way to one
01:53
percent still far below inflation so big
01:56
banks really did kick ass back in the
01:58
day but now not so much in a mostly
02:01
online and post-pandemic world these big
02:03
bank branches have turned from assets
02:05
into liabilities rents and leases are
02:07
high and foot traffic is low so these
02:10
buildings give banks a lot less bang for
02:12
their buck the average annual cost per
02:14
active bank branch hit a record high of
02:16
over half a million dollars a year in
02:18
2018 and banks like jp morgan bank of
02:21
america and wells fargo have many
02:23
thousands of these bank branches around
02:25
the world and tens of thousands more
02:27
atms on top of that this is serious
02:29
physical infrastructure that costs money
02:31
to lease maintain power and so on foot
02:34
traffic at bank branches is down because
02:36
the in-bank experience is filled with a
02:38
lot of friction driving there waiting in
02:41
line dealing with other people filling
02:43
out forms having to put on pants
02:45
probably not in that order on top of
02:47
that the financial experience at big
02:49
banks also comes with a lot of friction
02:51
late fees atm fees high interest rates
02:54
on loans account minimums to open and
02:56
fees if you want to close and my
02:58
personal favorite non-sufficient funds
03:00
fees that's where you get charged money
03:01
for uh not having enough money the
03:03
reasons big banks have to do this are
03:05
simple they need to cover the costs of
03:07
their big buildings networks of atm
03:09
machines and everything else that used
03:11
to help them acquire customers in an
03:13
offline world if we take all the costs
03:15
of running these big banks and divide it
03:17
by the number of customers they're
03:18
acquiring we get their customer
03:20
acquisition costs according to arc
03:22
invest research those costs were roughly
03:24
925 dollars per customer in 2019. this
03:28
means a couple of things to us investors
03:30
first it means that for the same size
03:32
checking account or whichever financial
03:33
product you want to compare banks net a
03:36
much lower amount than digitally native
03:38
companies said another way banks need
03:40
people to deposit or borrow much more
03:42
money than digital wallets to break even
03:45
for example these customer acquisition
03:47
costs mean that big banks don't break
03:49
even on a checking account until it's at
03:51
about 6 500
03:52
in 2020 surveys suggested that the
03:54
median savings account balance in the
03:56
united states was just 3 500 meaning the
04:00
average bank would actually lose around
04:01
three hundred dollars on that account
04:03
over its lifetime even if you add
04:05
another two thousand dollars to that
04:07
number which is the median emergency
04:08
fund in the united states a big bank
04:10
would still lose around one hundred
04:12
dollars on that client's accounts put
04:14
together so arkhanvest's math shows that
04:16
the average big bank loses money on
04:18
banking the average american my sincere
04:20
hope is that big banks continue to close
04:22
their worst performing bank branches and
04:24
shed these costs over time after all
04:27
those costs are getting passed on to us
04:29
doing that would move this blue line
04:31
upward to the purple line this is a
04:33
totally different story for digital
04:34
wallets because their customer
04:36
acquisition costs are so low due to them
04:38
not having any networks of bank branches
04:40
or physical atm machines and so on this
04:43
means two things for digital wallets
04:45
first they make about seven hundred
04:47
dollars on the median checking and
04:48
emergency account total of fifty five
04:51
hundred dollars second they actually
04:53
break even on an initial account balance
04:55
of just 150
04:57
meaning they can start serving people
04:58
who are unbanked or underbanked today in
05:01
2020 the fdic found that over six
05:03
percent of households or 14 million
05:06
americans are unbanked that's a lot of
05:08
potential clients for digital wallets
05:10
that legacy banks simply can't go after
05:13
add to that how quick streamlined and
05:15
personalized these services can become
05:17
when they're handled by artificial
05:18
intelligence and you get a real recipe
05:20
for disruption of the way big banks are
05:22
working today i'm not telling you to go
05:24
short big banks but i am telling you
05:27
that big banks will need to start
05:28
looking at least a little more like
05:30
digital wallet companies in the future
05:32
if they want to stay competitive this is
05:34
why i think digital wallet companies are
05:36
worth talking about right now even
05:38
though traditional banking stocks are
05:39
way up and fintech stocks are way down
05:42
so with that context on how digital
05:44
wallets could disrupt these big banks
05:45
let's take a serious look at the big two
05:47
square and paypal for the rest of this
05:49
episode i'll be using square and block
05:51
interchangeably since some of my sources
05:53
are from before square changed its name
05:56
arc invest published a lot of research
05:57
comparing squares cash app to paypal's
05:59
venmo in their research they showed that
06:01
digital wallets in the us can provide up
06:03
to an 800 billion dollar market
06:05
opportunity they also do some clever
06:07
research using google trends to show the
06:09
rising adoption of cash app versus venmo
06:12
but there's much more to these companies
06:13
than their digital wallet offerings
06:15
here's an interesting difference in
06:17
kathy woods trading activity between
06:19
them kathy wood has been actively buying
06:21
the dip on block as its price got cut
06:23
literally in half over the past three
06:25
months her average buy price over the
06:27
last month is a little over 150 dollars
06:30
per share and block stock is around 15
06:32
percent lower than her average buy price
06:34
today square or now block is arc
06:36
invest's ninth biggest position overall
06:38
with over three quarters of a billion
06:40
dollars in it across rk arc f and arc w
06:43
arc invests fund themed around the next
06:45
generation of internet applications on
06:47
the other hand paypal is arkhamvest's
06:50
97th biggest position it's only in arcf
06:53
and kathy wood has been selling out of
06:54
it her average buy price over the last
06:56
month for paypal is a little under 190
06:59
dollars per share and it's trading about
07:01
10 percent lower than that right now so
07:03
even though these are both digitally
07:05
native fintech companies that could
07:06
disrupt different areas of legacy
07:08
banking comparing them may not be as
07:10
apples to apples as i thought when i
07:12
started my research for this episode
07:14
this is something i feel investors
07:16
actually don't talk about enough so let
07:17
me make a quick point here zoom versus
07:20
microsoft is a bad comparison to make
07:22
because an investor cannot buy team
07:24
stock when you buy microsoft stock only
07:26
a very tiny fraction of that stock is
07:28
represented by microsoft teams think
07:30
about all the other things you're
07:32
investing in when you buy microsoft
07:33
stock windows xbox microsoft office and
07:36
azure the list goes on and on microsoft
07:39
is a great stock but if you're looking
07:41
for a pure play internet-based
07:42
communications company microsoft stock
07:45
isn't it so while it's fair to compare
07:47
zoom to teams you can't compare zoom
07:50
stock to microsoft stock those
07:52
businesses do incredibly different
07:53
things in my understanding this is why
07:55
arkanvest holds zoom but not microsoft
07:58
roku but not amazon pound here but not
08:01
google watch out for these faulty
08:03
comparisons because in all of these
08:04
cases i just mentioned you might want to
08:06
hold both stocks instead of choosing one
08:09
over the other let me show you just how
08:11
different these two companies are square
08:13
is focused on building two interacting
08:15
ecosystems one for sellers and one for
08:17
individuals as buyers the seller
08:19
ecosystem focuses on a few key areas
08:22
managing in-person and online payments
08:24
providing sale solutions and business
08:26
tools financial services including
08:28
credit payroll and loans and a platform
08:30
for third parties to develop new tools
08:32
integrations and vertical specific
08:34
software for different kinds of
08:36
businesses from a technology point of
08:38
view there are two things about square
08:40
that really stand out to me first
08:42
they're vertically integrated meaning
08:43
their hardware software services and
08:46
data are all built and maintained by
08:47
them instead of outsourced to outside
08:49
vendors that's important because they
08:51
have tight control over product
08:53
development and the user experience at
08:55
every level the second thing is that
08:56
they do automated risk assessments using
08:58
machine learning and maintain high
09:00
acceptance rates this is actually really
09:02
tricky because a small error in these
09:04
algorithms can result in providing a lot
09:06
of non-performing loans or lines of
09:08
credit i made a few videos about stone
09:10
stock ticker symbol st e where we saw
09:12
just how massive of an impact getting
09:14
these risk assessments wrong can have on
09:16
the bottom line of a company square
09:18
being able to automatically approve a
09:20
high amount of these loans with fair
09:22
rates while keeping their risks in check
09:24
is a pretty big deal and requires
09:26
mountains and mountains of data another
09:28
smart thing that square did was acquire
09:30
after pay one of the biggest names in
09:32
the buy now pay later space they
09:34
announced the 29 billion deal last
09:36
august and it's expected to close soon
09:39
in the first quarter of 2022 so square
09:42
is focused on building deep feature-rich
09:44
solutions for individuals and
09:45
micro-merchants small and medium-sized
09:47
businesses and then move upstream to the
09:49
mid-market that's who this ecosystem is
09:52
for smaller sellers let me just mention
09:54
one thing about cash app which is
09:56
square's digital wallet and their
09:57
ecosystem for individual buyers remember
10:00
the 925 dollar customer acquisition
10:03
costs for big banks that i mentioned
10:04
earlier cash app's customer acquisition
10:06
costs for q3 of 2021 was just five
10:09
dollars so while it takes an average big
10:12
bank well over five years to break even
10:14
on a typical account cash app gets a
10:16
positive return on their customer
10:18
acquisition costs within the first year
10:20
often much sooner than that that's a
10:22
pretty big difference right okay where
10:24
square is more of a business solutions
10:26
ecosystem paypal is more of a payments
10:28
processor and independent payment
10:30
gateway customers can connect through
10:32
and pay using paypal just about anywhere
10:35
including internationally since paypal
10:37
can handle currency exchanges just like
10:39
square did with afterpay paypal acquired
10:42
paydee a two-sided payments platform and
10:44
provider of buy now pay later solutions
10:46
in japan for 2.7 billion dollars or
10:49
about 10 times less than square's
10:51
acquisition of afterpay paypal has lots
10:54
of integration with other apps making
10:55
them a great backup payment method that
10:57
almost every kind of business can accept
11:00
larger sellers tend to prefer paypal
11:02
because they have lower transaction fees
11:03
than square which makes more of a
11:05
difference the more transaction volume a
11:07
business has keep that in mind when i
11:09
show you their financials paypal is
11:11
focusing on payment solutions for the
11:12
broadest number of users and has a wider
11:15
global reach than square venmo paypal's
11:17
digital wallet is more limited than
11:19
squares cash app but it has features
11:21
like discovering deals accessing lines
11:23
of credit buying crypto buy now pay
11:25
later features and so on venmo is
11:28
getting integrated with amazon which is
11:30
greatly going to increase their total
11:32
payments volume through the app in 2022
11:34
and beyond at the same time amazon is
11:37
stopping accepting visa credit cards
11:39
issued in the uk this week due to a
11:41
face-off over transaction fees now
11:44
amazon is taking steps like offering uk
11:46
customers a gift card to switch their
11:48
payment methods away from visa and is
11:50
also reviewing the amazon visa credit
11:52
card here in the usa these things should
11:54
clearly have a big impact on visa's
11:56
stock so it is possible for giant legacy
11:59
finance companies to get disrupted like
12:01
this over time this is a visa we're
12:03
talking about here anyway the trend here
12:05
is that square is a deeper ecosystem of
12:07
offerings for a narrower audience while
12:09
paypal is a suite of payments processing
12:11
solutions for a global audience this
12:13
could be why square can be found in arc
12:15
w and rk while paypal is only found in
12:18
arcf let me move on to highlighting
12:20
their financials and telling you which
12:22
one i'd buy right now square is
12:24
currently trading at less than half of
12:25
its all-time high at a price to sales
12:27
ratio of well under four square has a
12:30
gross payment volume of about 41 billion
12:32
dollars for quarter three of 2021.
12:34
square's revenue was about 3.8 billion
12:37
dollars which grew about 27 percent year
12:39
over year their gross profit was about
12:41
1.1 billion dollars that's a gross
12:44
margin of about 29
12:46
their operating income was 23 million
12:48
dollars million not billion giving them
12:51
an operating margin of 0.6 percent their
12:54
net income was a loss of 2.9 million
12:56
dollars so they were just barely
12:58
unprofitable for the quarter this is the
13:00
kind of company that kathy wood really
13:02
focuses on since they sacrifice profits
13:04
today and reinvest all of their cash
13:06
into good healthy growth and we know
13:09
it's good healthy growth because their
13:10
customer acquisition costs are so low we
13:13
know they're not spending money on
13:14
things like marketing and promotions to
13:16
win new business they're spending that
13:17
money on research development ramping up
13:20
new offerings and acquisitions the
13:22
challenge here is that companies with
13:24
relatively low net earnings are the
13:26
exact ones that suffer when interest
13:27
rates rise which is what we're seeing
13:29
right now in the market now let's talk
13:31
about paypal paypal is trading at a 45
13:34
discount relative to their all-time high
13:36
at a price to sales ratio of about eight
13:38
it seems like square is a better buy at
13:40
first but that's a little misleading
13:43
here's why for the same quarter paypal's
13:45
total payment volume was 310 billion
13:48
dollars almost eight times higher than
13:50
squares their revenue was about 6.2
13:52
billion dollars which is up about 13
13:55
percent year over year so square is
13:57
growing twice as fast but keep in mind
13:59
that they're growing from a much smaller
14:01
baseline of that about 3.6 billion
14:03
dollars was gross profit for paypal or
14:06
about 58 in terms of gross margins which
14:09
is literally double squares that's why
14:11
paypal should be trading at twice the
14:13
price to sales ratio of square paypal
14:16
also had a billion dollars of operating
14:18
income which means their operating
14:19
margins are almost 17
14:21
they actually had a net income of 1.1
14:24
billion dollars after including
14:25
non-operating revenues like changes in
14:27
exchange rates interests and so on which
14:30
translates to a 17.6 profit margin so
14:33
paypal is in a much safer financial
14:35
situation today in an environment that
14:38
punishes future risks comment below or
14:40
tweet me at ticker symbol u with your
14:42
thoughts on fintech companies versus
14:44
brick and mortar banks as well as square
14:46
vs paypal do you think square's customer
14:48
acquisition costs of just five dollars
14:50
pose a big threat to big banks which pay
14:52
over nine hundred dollars to acquire a
14:54
similar customer what do you think about
14:56
the financial health of paypal versus
14:58
square now that we know interest rates
15:00
are set to rise throughout the next
15:01
couple years i read all my comments and
15:03
tweets and i'm excited to hear your
15:05
thoughts as for me here's exactly what i
15:07
think will happen and how i'm playing it
15:09
i've been thinking about this ever since
15:11
i saw that clip of chamaf how many times
15:13
do you have to get your face ripped off
15:15
to realize you're just an idiot go short
15:17
a bank so i'm not going to short big
15:19
banks but i am going to keep betting on
15:21
digital wallets i think that brick and
15:23
mortar banks are going to keep closing
15:25
more and more physical branches and at
15:27
the same time i think they're going to
15:28
keep coming out with more and more
15:30
fintech offerings like digital wallets
15:32
stable coins payment gateways and
15:34
frictionless solutions for peer-to-peer
15:36
transfers what i'm saying is that banks
15:38
are going to have to innovate to stay in
15:40
the game which means they're going to
15:41
have to look a lot more like square or
15:43
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
15:53
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
16:03
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
16:13
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
16:19
now so for every 400 or so dollars i'm
16:21
gonna put into square i'm also going to
16:23
put something like 100 into paypal to
16:26
add a little more stability to my
16:28
investments in fintech if interest rates
16:30
rise more than expected i'll start
16:32
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
16:37
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
16:45
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
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