A $69 Billion Fintech Stock That’s Soaring
Finding about the merits of a given disruptive technology stock late in the game makes it tough for new investors to establish an entry point. Ideally, you identify a portfolio of stocks you like, and buy a little bit each month with the extra income you have because you live below your means. Then, you’re able to diversify your emotions a bit.
- Stock goes up – you’re happy because shares you hold appreciated, but sad because you’re having to pay more for the same shares
- Stock goes down – you’re sad because shares you hold are worth less, but happy because you’re buying shares cheaper
That’s why sometimes it’s good to just start investing right away because we all know it’s about time in the market, not timing the market. That’s easier said than done when a chart looks like this:
The chart above is a fintech company that came across our radar recently that we’d like to own shares in. Let’s start with some background as to how we came across this stock. It all started with the construction of our own tech stock portfolio.
The Bait and Switch
Our mandate is to help disruptive technology investors make better investing decisions. We now offer a subscription product – Nanalyze Premium – which means the paying subscribers who help put beer in our fridges have a say in the direction of our subscription product. What many have been telling us is that they want more specifics. Says one premium subscriber, “Where on your service do I find recent recommendations?”
We don’t make recommendations because you need to make your own decisions based on your own convictions. What we can do is share with you our decisions and convictions. So, we’ve started working on a Guide to Investing in Disruptive Technology Stocks that talks about stocks we love, stocks we like, and stocks we avoid. We eat our own dog food around here, so we’ll be holding all the stocks we love. Most pundits don’t. They’ll fish you in with some clickbait article, then pull the old bait and switch. You know, this old spiel:
Saying your portfolio “tripled the market” while not providing any time frame or benchmark is useless information. We’d be happy if our own tech stock portfolio “tripled the market,” but we’d be even happier if during the process we all learned how to become better investors. On that note, we turned to the experts in this space to
leverage all their hard work take inspiration from their wisdom.
Leveraging the Hard Work of Others
We often conduct sanity checks on our findings by comparing them to what other experts say. The most visible experts in disruptive technology investing right now are the folks over at ARK Invest who command almost one-third of the assets under management for actively managed ETFs at the moment. They recently collaborated with MSCI to produce a number of global innovation indices.
We previously looked at the top-ten holdings of ARK’s flagship ETF, ARK Innovation, and third on that list was a company called Square (SQ). Similarly, ARK’s Fintech Innovation ETF lists Square as the number one holding, more than double the weighting of the next constituent.
While Square’s weighting may reflect its rapid stock price appreciation, it’s still one of their top picks.
As we start to put the finishing touches on our own portfolio of disruptive tech stocks, we’re noticing some stocks we’d like to hold but we’re not because our underpaid research team missed some gem that should have been on our radar. Square is one such stock.
Square – A Pure-Play Fintech Stock
Up until now, we haven’t really looked for pure-play fintech stocks. Instead, we’ve been focused on alternative asset classes which seem much more interesting – fine art, farmland, and wine, the latter of which we’ve actually spent far too much money on. (Wine investing becomes addictive quickly, until you realize it’s an asset class that costs you money to keep. But you can also drink it, so it kind of evens out in the long run.)
In looking at the top-10 stocks held by ARK’s Fintech Innovation ETF, there are some interesting names – like MercadoLibre, said to be the Alibaba of Latin America. (Alibaba is the eBay and Amazon of China.) Other names aren’t so interesting – like the legacy of Saint Steve Jobs, Pinterest, and Lending Club. What we’re looking for are a handful of pure-play fintech stocks to hold that show the most promise out of the bunch. They say follow the money, so seems like Square is a no-brainer, given the experts are so bullish on it.
We’re now halfway through the article, and we’ve learned almost nothing about Square, so let’s look at what they actually do.
What Does Square Do?
Founded in 2009 by Twitter’s own Jack Dorsey, Square took in $590 million in funding before having their initial public offering (IPO) in November of 2015. Unlike Twitter, Square makes a positive contribution to society as a $66 billion market cap merchant services aggregator and mobile payment company that aims to simplify commerce through technology. More specifically, they are targeting two distinct ecosystems:
The total addressable market (TAM) for the Sellers ecosystem alone is estimated by Square to be around $85 billion. (Square had 2019 revenues of around $4.71 billion.) At the core of this ecosystem are the legacy point-of-sale payment processing hardware and software systems which is where it all started. Once Square had insights into these business transactions, they could then start to offer additional products and services. No need to fill out a loan application to figure out your credit risk. Square can offer you a loan based on their understanding of how much potential your business has because they can see all your transactions.
At the core of the Individuals ecosystem is Cash App, a mobile payment solution which offers a whole slew of financial services.
Now, here’s where things get a bit odd. Check out this gem in their latest letter to shareholders:
Cash App delivered strong growth in the second quarter of 2020, generating $1.20 billion of revenue and $281 million of gross profit, which increased 361% and 167% year over year, respectively. Excluding bitcoin, Cash App revenue was $325 million, up 140% year over year.
Intuitively, this doesn’t sound right. That’s because it isn’t right. In fact, one might argue it’s downright deceptive. Take a look at the below table:
We’re not bean counters by trade, but it doesn’t seem right that buying $858 million of bitcoin and reselling it for $875 million should count as revenues – especially when it directly affects the stock price (more on this later). Fortunately, that’s not where the company plans to add the most value.
One of ARK’s analysts, George Whitridge, can be found on YouTube pontificating about the opportunity Square has in front of them. (Mr. Whitridge knows a thing or two about Square since he worked there for nearly five years.) He thinks the real value add is when you combine both ecosystems and start to glean insights from both sides of the transaction. (Sounds similar to the closed-loop system American Express had built, though we’re not sure how that’s been working for them lately.)
Investors clearly see the potential here. Since their IPO in 2015, shares of Square have returned +1,113% compared to a NASDAQ return of +121% over the same time frame.
Buying Square Stock
This is a stock that was on sale at $39 a share back in March, and is now trading at over $155 a share – a gain of about +300% in just five months. Some of that appreciation can be explained earlier this month when revenues soared because of all that bitcoin malarkey.
Totally not digging that, and surprised analysts aren’t making a big stink about this. Maybe someone out there can explain why counting bitcoin sales as revenues makes the slightest bit of sense.
Regardless of the company-specific reasons for that rapid stock price appreciation, tech stocks as a whole are reaching lofty heights with investing legends like Warren Buffet sounding the alarm. At the same time, you have weekend warriors over at Robinhood buying bankrupt stocks, and then filing complaints when they find out how the bankruptcy process actually works.
Is anyone surprised that the generation that doesn’t understand interest rates, also doesn’t understand risk? In light of what’s happening with “the rona,” many are at a loss for words as to why tech stocks are soaring across the board and the markets continue to set new highs. (Some tech stocks are obviously benefiting from the pandemic, but that’s not what we’re talking about here.)
The nice thing about buying quality dividend growth investing stocks is that they rarely become heavily discounted. As for tech stocks, they’ll drop like a rock if calamity afflicts the markets. That’s when you want to have some dry powder. Consequently, the longer it takes you to accumulate a position, the more likelihood you might see a dip in the stock price which could represent a good buying opportunity. For example, we recently pulled the trigger and opened a position in a data science stock that fell -40% when they revised guidance due to the rona.
Since there are no brokerage fees anymore, you could just buy one share of Square every month. If a dip happens, then add to your position. Sure, that’s speculating, but remember that you’re only a buyer. You plan to hold this company for at least half a decade or more. The sort of disruption that results in exponential returns takes time.
Square is one of those companies you want to own, but don’t want to climb on board after the stock price goes up +300% in 154 days. At the same time, that’s what we thought when we were buying NVIDIA at double-digit prices. Seems cheap now, but it didn’t seem so back then.
If you see Square as a viable long-term investment, just start dollar-cost-averaging your way into a position. Pick a fixed day of the month, then buy a small fraction of your position on that day every month. As we said earlier, you’re going to experience some happiness regardless of what the market ends up doing. Just be sure it’s part of a well-diversified portfolio. Rare is the investor who “triples the market” by putting all their eggs in one basket.
We sold our Global X Fintech ETF holding and used the proceeds to purchase a legaltech stock with a 70% market share. A $50 billion opportunity awaits, and they've only achieved about 3% penetration – plenty of room to run. Become a Nanalyze Premium annual subscriber and we'll show you our entire portfolio of more than 30 tech stocks.