Chances are you’ve seen some recent headlines about “the death of cash,” accelerated by the coronavirus.
Despite these predictions, a report by Cardtronics notes “preferred payment methods are virtually identical today to the fall of 2019.”
But as our macro specialist, Eric Fry, wrote in his Smart Money article this week, “old habits die hard. But that’s okay. New habits grow exponentially.”
What is Eric talking about?
The rise of fintech — a market expected to nearly double to $10.1 trillion by 2024.
In today’s Digest, let’s turn to Eric to look at one current, huge fintech winner — and at another company that he believes will be a future huge winner …
I’ll let Eric take it from here.
Have a great weekend,
Old Habits Die Hard, but New Habits Grow Exponentially
By Eric Fry
They’ve been predicting the death of cash for about as long as I can remember.
And over the decades, as debit cards, online banking, and electronic payments arose, their arguments that cash would soon become obsolete became more feverish (but also more coherent).
I’ve likely made a few such speculations myself over the years … but last time I checked, I still had a handful of change in my pocket.
Then, as COVID-19 started messing with our lives, the usual suspects started once again talking up the “death of cash” anywhere that would have them.
Indeed, it’s easy to see “dirty” cash as a possible coronavirus vector point.
However, a recent report from Cardtronics compared consumer payment preferences from the depths of the coronavirus crisis in April 2020 to those in the pre-COVID-19 fall of 2019. In the fall of 2019, 16% of all consumers picked cash as their “most preferred payment method.” In April, 15% of consumers picked cash.
“Preferred payment methods are virtually identical today to the fall of 2019,” the Cardtronics report noted.
Old habits die hard.
But that’s okay. New habits grow exponentially.
The long-term trends for fintech are rising. Adapt Insights pegged the market at $4.8 trillion by at the end of 2019, and it says that figure will nearly double to $10.1 trillion by 2024.
That’s because companies that develop and employ cutting-edge technology are growing to huge sizes faster than ever … grabbing market share faster than ever … and changing the world faster than ever.
This exponential progress is creating a Technochasm between companies that develop and use technology successfully … and those that don’t.
So today let’s take a look at one current huge fintech winner — and at another company that I believe will be a future huge winner …
Bank on This
Before going further, let’s define fintech.
The term refers to any new technology that improves or automates financial transactions. But increasingly, fintech has become shorthand for any type of disruptive finance-focused technology, from mobile payment apps to cryptocurrencies.
Generally speaking, fintech companies enable individuals and companies to conduct financial transactions without having to use traditional bank-based channels.
Square Inc. (SQ) is one of them, and it is probably the best-known “disrupter” of payment processing. The San Francisco-based company focuses on small businesses — enabling them to take payments through a variety of point-of-sale mobile payment methods.
Millions of merchants use Square’s app to process payments through their smartphones. You may have seen a taxi driver, for example, take a payment by swiping your credit card through a plug-in device on his smartphone. That taxi driver was probably using the Square app.
Square is a leading payment processor that is attempting to become a leading digital bank, also known as a “digital wallet.”
From its inception, Square has provided payment processing services to small merchants — predominantly a mobile app that enables merchants to process credit card payments on their mobile devices.
This business has grown rapidly for many years but has been slowing recently.
However, the company also operates fast-growing digital banking services via its Cash App. Because this business has been growing at triple-digit rates year-over-year, it now accounts for about one third of Square’s gross profits.
And based on the growth trajectory of this business, it should account for half of gross profits within two years.
Cash App is a money transfer platform that allows users to send, store, and/or receive cash. But Square continues to add features the platform to make it more competitive in the marketplace.
And there is plenty of competition!
That’s the biggest risk to the stock. Square competes against folks like Venmo, Zelle, and Apple Pay.
Another risk is that the company is prioritizing revenue growth and market share over profitability.
Even so, it has been generating robust free cash flow. Assuming the company’s core payment-processing business maintains slow and steady growth, while the digital banking business generates high double-digit growth, Square will be a winner.
But it won’t be the only one …
A Square Path
That’s why I think you should take a look at a company whose business model is very similar to Square’s, which is why many folks refer to it as the “Square” of the nation it calls home.
Square has soared nearly 1,500% since its 2015 initial public offering.
I see this other stock — one of the top recommendations at Fry’s Investment Report — taking off on a similarly profitable path …
It serves millions of entrepreneurs and small merchants in its home country, so it is well positioned to prosper from renewed economic vitality in that nation.
The company describes itself as a fintech disrupter focused on small and even micro-sized companies. It enables small merchants to process digital transactions without having to use banking or credit card intermediaries.
In roughly three years, the company has more than tripled its count of active merchants. Earnings have also more than tripled during the last three years.
But fast-growing companies like this rarely deliver breakneck growth every single quarter. That’s not how the world works … usually.
Instead, fast-growing companies achieve their growth in fits and starts. That’s what this company has done — and continues to do.
Earlier this year, the stock had crumbled 70% from its high last September to less than $15. But since that low, the stock has more than doubled — making it one of the best stocks in one of the world’s hardest hit stock markets.
Year-to-date, it’s now up 12.5%, even though its home nation’s stock market is down more than 30%. Despite the COVID-19 crisis, the company still managed to produce impressive year-over-year growth during the first quarter. A few pertinent highlights would include:
- 24% increase in active merchants on its payment platform
- 27% jump in revenue
- 13% gain in net income
- 10% boost in cash on the balance sheet
Additionally, the company seems to be benefiting from the coronavirus in at least two ways …
First, its core customer base of micro-merchants is made up of the kind of entrepreneurs who cannot afford to shelter in place. They must work to eat, and so they are continuing to operate throughout the coronavirus crisis.
Second, it offers a “touchless payments” option for individuals who transact over its platform. Because of virus fears, touchless payments have become increasingly popular, relative to cash transactions.
Meanwhile, the company continues to make rapid strides with its digital banking venture. From a standing start a little more than year ago, the venture has attracted 3.7 million people to its digital banking platform. And many of these new customers are eager to reduce their exposure to the coronavirus by using its many digital services.
Bottom line: This company is performing extremely well in the midst of challenging macroeconomic conditions.
The road ahead is not likely to get any easier until sometime next year. But as long as the company maintains its momentum and continues to gain market share, I’d expect the stock to reach a new high in 2021.
Now, I can’t give you the name of this company. It wouldn’t be fair to the members of my Fry’s Investment Report service, where it’s shaping up to be one of our biggest winning trades.
But you can find out more about how to join us — and about the many other future huge winners in our portfolio — by heading here.