Apple’s (NASDAQ: AAPL) ambitions in the digital-wallet industry will propel it into a head-on clash with Facebook’s (NASDAQ: FB) recently announced cryptocurrency, known as Libra. This clash will have a major impact on AAPL stock.
In the past few quarters, Facebook has faced a lot of trust and privacy issues. But the scope of its cryptocurrency project reveals the large extent of its aspirations in this industry. On the other hand, Apple launched its payments platform in 2014 and since then it has been progressing slowly. The future performance of AAPL stock is closely linked to the company’s ability to seamlessly integrate its new services with its payments platform. Heavy share buybacks can help Apple stock in the near-term, but the long-term returns of AAPL stock will depend on AAPL’s fundamentals.
Apple has very low market share in some overseas regions, reducing its ability to expand Apple Pay. The digital-wallet industry in the U.S. and other regions could end up being very similar to China’s digital-wallet sector. In China, Alibaba (NYSE: BABA, which owns the country’s largest e-commerce website and Tencent (OTC: TCEHY), the owner of its largest messaging.multi-purpose app, control over 90% of the digital-wallet industry.
In this business, the most popular social media and retail platforms have a big advantage due to the large number of customers they have. Despite Apple’s best efforts, Apple Pay could end up becoming a small player in the rapidly evolving payments industry. That will hurt Apple’s Services business and its margins.If Libra’s launch is successful and it is widely accepted, the sentiment towards Apple stock will certainly be negatively impacted.
Apple’s Progress Versus Facebook’s Ambitions
Apple has recently raised the bar on its payments business by joining hands with Goldman Sachs (NYSE:GS) to launch a credit card called Apple Card. According to Bloomberg, AAPL is already testing this card among thousands of Apple Store employees. Apple launched its payments platform in 2014 and since then it has been slowly adding new features. But Apple could end up being a laggard in the payments industry, as other players are ramping up their own payments platforms.
Facebook recently announced its own cryptocurrency which has already received a lot of attention. Even central bankers around the world have given their opinion on this new platform. Facebook certainly faces a major “trust deficit” due to a number of missteps it has made. The privacy issues surrounding FB’s main social media platform are also a headwind for Libra. But Facebook should be applauded for its boldness. If successful, Libra could provide banking options to the underbanked regions of the world, making the currency quite useful.
Despite FB’s privacy issues, I believe the future success of Libra or any other payments platform primarily depends on its usability. Both Alibaba and Tencent have shown this with their respective digital wallets in China. Facebook’s massive user base should help it rapidly grow its new payments platform. FB can eventually use the platform to enter services which Apple is targeting.
Close to 50% of the population in China uses a mobile-payment system, according to eMarketer. In terms of market share, Alibaba’s Alipay has 54%, while Tencent has 40%. Apple Pay has also been launched in China, but it’s not used very much there.
If the trend in the U.S. ends up being similar, Amazon (NASDAQ: AMZN) and Facebook will have the biggest market share in the digital-wallet space due to their retail and social media ecosystem, respectively. This will have a significant negative impact on the future returns of AAPL stock.
Prior to Facebook, Apple was already facing competition from other tech giants in the payments industry. Amazon is looking to ramp up its investment in this space. Amazon Pay recently invested INR 4.5 billion ($65 million) in India. In the past three years, it has invested INR 30 billion (approximately $450 million) in Amazon Pay in India. Amazon has also recently launched flight booking and other new features to attract more transactions on Amazon Pay in India. It is likely that Amazon will make bigger investments in Amazon Pay in other international regions and the U.S. market in the near-term.
Like AMZN, Apple has a lot of resources and very high free cash flow. But AAPL’s management has not invested aggressively in an effort to make Apple Pay more popular. Amazon can monetize Amazon Pay through its retail platform. However, Apple does not have a similar option. This could be one of the reasons why Apple is much more reluctant to invest in its payments platform.
Amazon has recently launched a secured credit card. Prime users get 5% cash back on the products they purchase from Amazon using the card. This shows that Amazon can use multiple incentives to attract new customers to its payments platform. Ideally, Apple could have built digital-payments platform that would be geared to all the retail competitors of Amazon, but it has not done so.
It should also be noted that Apple’s market share in several international regions is very low. Apple’s sells less than 2 million iPhones per year in India. On the other hand, there are hundreds of millions of users on Facebook and Whatsapp in India. Even in Europe, the market share of Apple is nowhere close to its market share in the U.S. In Germany, AAPL has a market share of 21.1%, while in France it is just 20.2%.
Impact on Margins and Other Services
A successful payments platform can be used to develop and popularize new financial products. This has been shown by both Alibaba and Tencent in China. It also helps to make new services more popular. As a result, it is very important for Apple, which is betting on services to drive the future growth of the company and raise AAPL stock. to have a strong payments platform.
The Bottom Line on AAPL Stock
Facebook has made an audacious attempt to build a new cryptocurrency-based payments system, creating another big challenge for Apple Pay. Amazon is already ramping its investments in and the initiatives of its payment system, both overseas and in the U.S.. A strong payments platform could be very lucrative because it enables the launch of new financial products and the increased monetization of current customers.
Apple Pay has already been limited to a very small market share in China. If the digital-payment initiatives of Facebook and Amazon are successful, the market share of Apple Pay in the U.S. and overseas could also be very small, increasing the headwinds facing Apple stock.
As of this writing, the author did not own shares of any companies named.