11 Best Digital Payments Stocks To Buy Now

“The pandemic had a profound effect on digital payments, driven by two key factors. The fundamental inability for consumers to make in-store transactions during lockdowns and general discomfort with exposure to physical environments; and the economical strain felt by consumers during the pandemic.” 

“Futu is a new “Opportunistic” position. It is an HK based online brokerage & wealth management platform with deep roots in technology. Futu sits in the confluence of 3 strong favorable forces of Meteorology, Topography & Commander, yet was underpriced at the time of our entry. In terms of Meteorology, there is a huge addressable market of Chinese domestic middle to upper classes’ wealth being deployed to overseas assets allocation in the next decade. Additionally, the incumbents being disrupted are extremely weak in their digital transformation. On Topography, Futu’s user-centric product design built an intuitive front end and great user experience, while the digital native development framework built a solid & reliable back end (including a self-developed order routing & execution system for the HK market). This is a rare combination compared to both offline incumbents (who lack flashy front end & UX) & other new online disrupters (who lack solid infrastructure). On Commander factor, founder CEO Li Hua was a Tencent engineer in its early days with deep knowledge in product design and development. Li is said to be a fanatic product manager, to this day still at the front-line, alpha testing any new features. Based on analyses of these factors, I think Futu could compound its revenue at a very high rate with very high certainty and with strong operating leverage, putting our entry price very attractive compared to earning power in 3-5 years. Yet just as we finished building a small position, the price started to take off and more than tripled in a month. When such price action happens, it is obvious that Mr. Market has turned very euphoric to this name. I decided to trim but kept a reasonable position given its growth certainty.”

“The Partnership recently established new positions in Green Dot (GDOT). As for GDOT, the company is a collection of old-school money access/money movement operations as well as new-school “FinTech” offerings. It is perhaps best known as the banking partner behind Wal-Mart’s prepaid MoneyCard debit card. Prepaid debt is among the least sexy financial service offerings in the market and I also suspect there’s a degree of snobbery among the investing class that its primary customers sit on a lower socio-economic rung. I think these factors are contributing to today’s opportunity.

One of the emerging trends in the “FinTech” space is integration of banking and payment services by consumer facing companies. The idea is that by integrating these services, companies can collect more data on spending patterns, drive a “stickier” customer relationship/brand loyalty, and ultimately drive more sales. At the same time, such consumer facing companies either can’t, or won’t, build out these platforms on their own. Doing so would require, among other things, 1) a specific degree of technological expertise and 2) ownership and control of a banking institution. The latter of the two factors – owning a banking charter – is a significant deterrent to “going it alone.” Owning a bank requires costly and time consuming compliance (AML/KYC, etc.) and ongoing regulatory scrutiny. Over the years, a long list of household names with financial services ambitions (including Wal-Mart) have either tried and failed, or proactively decided against owning and operating a bank. This is where someone like GDOT comes in, supplying the technical know-how and offering use of their banking charter without the headaches of actually becoming a regulated bank. In industry parlance, this has come to be known as “Banking-as-a-Service” or BaaS, for short.

GDOT’s relationship with Wal-Mart has shifted more in the direction of BaaS than “just” prepaid debit with WalMart last year converting all of their existing prepaid accounts to demand deposit accounts intended to function similarly to a traditional banking account. MoneyCard now comes complete with an app and various features like overdraft protection, early payday, and cashback on Wal-Mart purchases. Beyond Wal-Mart, GDOT has expanded its BaaS offerings with other large brands. Another interesting use case is its Partnership with Intuit’s QuickBooks. When you open a new QuickBooks business account, you’re given the option to open a QuickBooks branded business checking account at the same time, which is powered on the back-end by GDOT. There’s a lot of white space out there for GDOT to work with additional consumer facing companies to integrate payments and other banking services into their platforms. I’ll acknowledge that GDOT is far from the only “player” in the arena, but the mere fact that they’ve already bagged a number of large name clients on the BaaS side (Intuit/QuickBooks, Apple/Apple Cash, Uber/Uber Checking) at least suggests their capabilities and offerings have passed an intense amount of scrutiny…” (Click here to see the full text)

“We recently covered our short position in Affirm Holdings, Inc. (NASDAQ:AFRM) after a rapid decline brought the share price to ~$30 – down from our entry point above $100 – in only 7 months. We discussed Affirm in our Q4 letter, saying the following:

Affirm is a “Buy Now, Pay Later” (BNPL) company founded by former PayPal CTO and cofounder Max Levchin. They provide installment loans to consumers, partnering with retail companies looking to drive higher sales. They have two primary products: a zero-fee installment loan for consumers with the best credit scores, and a more traditional product with 20%+ interest rates for subprime borrowers. Their stated plan is to disrupt the credit industry with more transparent, lower-fee loans. At a roughly $28b market cap at the start of 2022, AFRM stock was priced at more than 20x trailing sales, a steep price for a money-losing lender. While their early lead in online BNPL transactions and partnerships with fast-growing retailers like Peloton has fueled significant historical growth, a wave of competition has arrived… While the stock has already fallen sharply from where we initiated our short position, we think it could fall another ~40% to trade at 8x FY2022 sales.

Interestingly, not much has changed about Affirm’s business from when it sported a $28b market cap. Estimates for 2022 sales have been inching up, from $1.25b at the start of the year to $1.35b today. And analysts estimate that the company will lose about $150m of EBITDA this year, slightly better than estimates in January. Rather than a story of deteriorating business fundamentals, this was a story of market participants simply deciding that a fast-growing, money-losing subprime lender – even a disruptive one – with around $1b of revenues should not be worth twenty-eight billion dollars. We think the current valuation is much more reasonable, and we do believe that Affirm will eventually generate profits from its lending platform, so we covered our short position.”

“While our list of potential candidates is filling up, we are being patient. We added two new positions in Q3: Fiserv, Inc. (NASDAQ:FISV) and Heineken. Fiserv is a provider of financial technology, core processing and payment processing services to financial institutions and merchants. The company reports three segments: acceptance (merchant acquiring), payments & networks (issuer processing and debit network), and fintech (core bank processing). Fiserv has strong market positions and scale across these businesses, but competitive intensity varies. In the acceptance segment, Fiserv owns Clover, a high-growth point-of-sale (POS) system forsmall and medium businesses, with similar annualized gross payment volume to Block’s Square. However, Fiserv is receiving little credit for Clover. The market is overly concerned about the competitive nature of merchant acquiring and legacy processors losing market share to new entrants. We believe Fiserv’s business is more resilient and will continue to grow in the medium term driven by its scale and Clover. Moreover, fintech and payments are good businesses that are undervalued by the market. Both businesses are in highly consolidated industries where scale advantages are critical, and revenues are sticky due to high switching costs. A high share of recurring revenue and profit, an attractive margin profile and high free cash flow conversion are characteristics that should provide downside protection, in our view. We started our position with shares selling for about 11X normalized operating profit. That is a below-average multiple for an above-average business.”

“We also sold out of payments and financial software maker Fidelity National Information Services, Inc. (NYSE:FIS), choosing to concentrate our digital payments exposure in PayPal (PYPL), which we believe has a more attractive risk/reward at these levels and more internal levers to generate returns. We bought FIS in 2019 for its mix of offense and defense with banking software and services as a stable business and payments that could keep up with fintech. The shares outperformed the benchmark up to the sale, illustrating the resiliency of the core business; however, FIS has underperformed higher-growth payment names.”

“In financials, American Express Company (NYSE:AXP) has done an excellent job demonstrating the resiliency of its franchise in the midst of a global pandemic that drove a 60% decline in its core travel and entertainment business. The company’s spend-centric model has been helped by fiscal stimulus ensuring a flush consumer, while management continues to execute well by adding millions of new consumer and small and medium business accounts, which should benefit the franchise over the medium to long term. We remain optimistic regarding the company’s prospects as travel and entertainment activity rebounds, adding to our position in the quarter.”