If you don’t own Apple stocks for its iPhones, iPads, portable devices, or services, here’s another reason to own the stock: It’s becoming a fintech player.
Apple (Symbol: AAPL) is making forays into financial services with its recently launched credit card, co-branded with Goldman Sachs Group (GS). Apple Pay is gaining traction as more consumers use their phones to pay for in-store purchases, avoiding handling money during the pandemic. Indeed, Apple owns the platform and device that millions of people are increasingly using to send money and e-commerce, making it an emerging competitor to financial services.
“I own Apple primarily because they are becoming a major player in the payments business,” says Dave Ellison, director of the Hennessy Large Cap Financial Fund (HLFNX), which counts Apple in the top 10. “Apple controls the phone and you want to buy stocks where the business is on the phone.”
Apple is one of many fintech stocks Ellison holds in his fund. Its top 10 holdings are almost entirely made up of fintech: PayPal (PYPL), Square (SQ), Visa (V), Mastercard (MA) and the payment processor Fidelity National Information Services (FIS). Only one major commercial bank, Citigroup (C), makes its list.
“I like businesses that move money, rather than guys who buy and sell money,” Ellison said in an interview, referring to banks, whose main business is taking deposits and to make loans.
Fintech stocks are not for value-conscious people. PayPal, one of the hottest stocks of the year, is trading at 42 times estimated earnings for 2021. Square, another superstar, is doing it 118 times. Visa and Mastercard have not performed as well this year – in part because transaction volumes are down and cross-border revenues have fallen sharply – but they are still 32 and 38 times, respectively. Apple is at 28 times estimated profits in 2021 and Fidelity National at 21 times future profits.
But high valuations aren’t a deal breaker for Ellison, in part because he doesn’t see better alternatives in the financial sector. Although he owns stocks of major commercial banks, including Citi, JPMorgan Chase (JPM) and Bank of America (BAC), he calls them wallet fillers. Big banks need to worry about the credit cycle, Federal Reserve interest rate policy, regulatory and congressional oversight and the yield curve, Ellison says. “If I have a PayPal or a Square, I don’t have to worry about it.”
The Fed’s growing control over financial markets is now a major obstacle for banks. The Fed’s balance sheet stands at nearly $ 7 trillion, up from $ 4.5 trillion at the start of 2015. And it now includes everything from mortgage-backed securities to repurchase agreements to corporate bonds, exchange-traded funds and assets held under its Main Street lending program.
Banks are directly affected by the size of the Fed’s balance sheet, rate decisions, asset purchases and other policy measures. With interest rates kept at historically low levels, bank loan margins are squeezed. Banks are also hesitant to lend to consumers and businesses, in part because the United States could enter a slowdown in the credit cycle, which would put pressure on the value of mortgages and other assets on their books.
“The banks are all in the same bucket, making loans, taking deposits on the margins, there is no difference with them, and there are so many stocks that it dilutes the real advantage of owning the stocks, ”says Ellison.
Fintech stocks are not immune to these issues, but they are much less directly affected, acting as the conduits and rails of the system. Stocks benefit from the scarcity value and tailwind of e-commerce which is gaining ground in the pandemic economy. The risk is that valuations are ruthless: they would fall sharply and quickly if growth slows.
It’s a bet Ellison is willing to take. “I’m not really concerned with the evaluation of Square,” he says. “Payment processors are the way into the future for stock performance. The value of equity in balance sheet companies like banks is simply not there anymore. “