Certain professions attract more self-important people than others, but none more than finance. It’s quite comical when you consider that over the long term, 95% of active managers – those who try and beat a broader market benchmark – cannot. There is no special magic required to be a good investor. Useful financial concepts can be made accessible to everyone, instead of pretending that investing is “complicated,” and best left to professionals.
When choosing between any number of stocks to invest in, analysts will often start whipping out PE/E ratios and doing comparables, when a much simpler approach might be more effective. Stock prices constantly change, financial metrics change, so we like to take a holistic approach to stock picking while using the KISS principle. Today, we’re going to compare three fintech stocks – Square (SQ), PayPal (PYPL), and Adyen (ADYEN:NA).
What We Are Looking For
Before we start doing any comparisons, let’s define what we’re looking for. We recently released the The Nanalyze Disruptive Tech Portfolio Report which lists over 20 stocks we’re holding across the various categories of disruptive tech we cover here at Nanalyze. Readers would have noticed the fintech section of the report says, “Coming Soon.” That’s because we’re in the process of figuring out which stocks and ETFs we want to hold that give us exposure to the many areas of fintech.
We recently wrote about a fintech ETF we’re accumulating which gives us good concentrated exposure to global financial technology companies. We like global companies, not just because of the geographical diversification, but because they often fly under the radar, and consequently attract less hype, therefore offering better value. (We have advanced degrees in finance, so we can make sweeping generalizations like this, and people will believe us without supporting evidence.)
In addition to the fintech ETF we’re holding, we’d like to find one or two more stocks that appeal to us in the fintech sector. We’ve decided that payment firms represent an attractive investment given their potential to disrupt the entire global banking system (in particular, there’s value to be had in emerging markets where they’re creating entirely new market opportunities). The below chart from The Economist – courtesy of the CB Insights newsletter – shows how payment firms are increasingly stealing market share from global banks.
Credit: The Economist
In our previous article on Square, we talked about the massive opportunity for merchant services and mobile payments. We did not like how Square decided to start including the value of bitcoin they’re selling as revenues, and the fact the stock price has been soaring to the moon. It’s one of 100 the most popular stocks among the Robinhood day trader types, and consequently behaves extremely irrationally:
But, we do like Square’s business plan, and the fact that multiple ETF providers are bullish on the stock. In other words, we like Square, but we don’t love it enough to buy the stock right now. So, we decided to look at what other companies might offer a similar value proposition to Square.
Square Stock vs. Adyen Stock vs. PayPal Stock
As every MBA knows, you always start by leveraging other people’s hard work, and then taking credit for it. An article by S&P Global Market Intelligence groups three payment providers – Paypal, Adyen, and Square – as those companies that are benefitting the most from the post-pandemic e-commerce boom. Let’s do some simple comparisons of these three stocks in an attempt to find the one that’s most appealing.
Market Cap Comparison
A basic measure of a company’s size is their market capitalization (number of shares X current stock price). Here’s how these three fintech stocks compare based on today’s market cap:
- Paypal – $241 billion
- Square – $84 billion
- Adyen – $60 billion
It’s incredible that Paypal is now worth nearly as much as IBM and Exxon Mobil combined. This information doesn’t really help us make any decisions, but we now know that one is much bigger than the others. Large companies can enjoy economies of scale, and are generally less volatile.
The Rona Effect
As the S&P article points out, all these companies have been perceived as benefiting from the pandemic. Here’s how much those market caps have appreciated since “the Rona” reared its ugly head (year-to-date returns):
- Square +181%
- Adyen +131%
- PayPal +85%
- Nasdaq Benchmark +30%
While stock prices are largely irrelevant for investors who believe that the value of any disruptive technology needs a good decade or two to fully mature, we can learn something here. All three of these companies have surged based on the belief that they will benefit from a temporary – we’re hoping anyways – pandemic. We don’t like to be buyers of stocks that are benefiting from a temporary thesis.
Comparing Revenues and TMV
The MBAs over at S&P did all the dirty work compiling a comparison of each company’s revenues over the past 13 quarters, so we’ll honor their hard work by including the below chart in our piece:
Credit: S&P Global Market Intelligence
We’re constantly emphasizing the importance of revenue growth, and all three firms seem to be on the right trajectory.
There’s another important metric we can use to compare these three providers – Total Payment Volume (TPV) – the value of payments, net of payment reversals, successfully completed. While each company labels this differently, they all offer up a similar metric – the volume of payments processed on their respective platforms.
- PayPal’s 2019 TPV – $712 billion
- Adyen’s 2019 Processed Volume in USD – $281 billion
- Square’s 2019 Gross Payment Volume – $106 billion
Now, we need to be careful here. We cannot assume that all three businesses have payment volume as a sole source of revenues. For example, here’s a rudimentary breakdown of revenue segments for Square:
Square’s 2019 revenues by segment – Credit: Square Annual Report
Still, the volume of payments being processed provides the real value behind the business model – an ecosystem where you can sell your customers more products because you understand their financial situaton based on their transactions. The payment volume metric is a good reflection of market share captured for these – as S&P calls them – payment gateways.
Domestic bias is the tendency for an investor to look in their own backyard for investments when there’s a much bigger universe of stocks that exists beyond their country’s border. Here’s where these three firms are deriving their revneues based on 2019 filings:
- PayPal: USA (83%), Non-USA (17%)
- Square: USD (85%), Non-USA (5%)
- Ayden: Europe (55%), North America (30%), LATAM (), Asia-Pacific (), Other ()
Both PayPal and Square are largely exposed to the United States. For Ayden, their exposure is much more geographically varied with just over half of revenues coming from Europe. As many Americans will tell you, Europe is a big country far far away with interesting cities like London-England, Spain – and of course the pinnacle of Europe – it’s capital city, gay Pair-eee. Also, they have Octoberfest somewhere over there, and you should go because it’s an absolutely epic cultural experience.
Adyen wins hands down on geographical diversification, and we find that’s a very attractive quality given we don’t know how the global economy will be affected by what’s happening in 2020. With that said, Adyen’s top 10 merchants account for 33% of total revenues (down from 47% in 2018), with no single customer accounting for more than 10% of revenues in 2019. We don’t like when a stock has a high concentration of revenues coming from a single client, and we don’t like it when all their revenues come from a single country.
To Buy or Not to Buy
PayPal may be the 800-pound gorilla in the room, but we’re not liking their overreliance on the Americans. The same goes for Square, and that whole “measure our bitcoin sales as revenue” thing just rubbed us the wrong way. Couple that with the Robinhood trader types driving up shares of Square, along with a relatively low gross payment volume compared to the other two providers, and we’re just not feeling it.
As for Adyen, they seem to check a lot of our boxes when it comes to the volume of business they’re doing, their relatively smaller size which gives them room for growth, and their geographical diversification. We can also purchase shares of Adyen on the Amsterdam stock exchange in euros, which gives us some much-needed foreign currency diversification.
You could always go long all three stocks and enjoy some added diversification, but as we’ve said before, we want to make very specific bets on a few names in each area of disruptive technology we cover so that we can keep track of what our stocks get up to. In tech investing as opposed to dividend growth investing, you need to check up on your holdings more often – at least once per year ideally. If some big news event happens, which is often the case in the fast-moving world of technology, you need to see if it changes your fundamental thesis in any way.
You can read through all the data and metrics you like, but at the end of the day, decisions need to be made. Using simple metrics to make decisions means you can easily compare them later to see how things are progressing. If you don’t want to try and pick a winner, just buy all three stocks. There is no right or wrong answer, but at the end of the day you need to make decisions on your own convictions and be confident in them. We’re confident that fintech stock Adyen checks most of our boxes.
Did we buy Adyen stock? You’ll find out in the next release of The Nanalyze Disruptive Tech Report which contains all the disruptive tech stocks we’re holding right now.
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