On today's Industry Focus: Tech podcast, Dylan Lewis answers questions from intern Eryn Ratcliffe about some of the most exciting aspects of the tech market today. What does Venmo do, and what makes it such an exciting new prospect in the sector? How can young people leverage their tech savviness to invest in better tech stocks, without buying into trends that only just sound good at first? What are some of the most pressing concerns about the wearables market? Listen in to find the answers to these questions and more.
A full transcript follows the video.
This podcast was recorded on June 24, 2016.
Dylan Lewis: This episode of Industry Focus is brought to you by Casper, an online retailer of premium mattresses for a fraction of the price, because everyone deserves a great night's sleep. Get $50 off any mattress purchase by visiting Casper.com/fool and entering the promo code "FOOL."
Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Friday, June 24, and we're wrapping up Interns Ask Week. I'm your host Dylan Lewis, and I'm joined in the studio by one of Motley Fool's interns for the summer, Eryn Ratcliffe. Eryn, how's it going?
Eryn Ratcliffe: It's going well, thanks for having me.
Lewis: So before we get too far into the show, Eryn, can you talk a little bit about what you've been doing here at HQ, what you're doing for school, all that stuff?
Ratcliffe: Yeah, I am a branding and marketing intern here at the Fool. I'm working on some graphic design for the Fool -- social media graphics and infographics, mainly, but also helping out on other platforms like Facebook and YouTube.
Lewis: And hopping on the podcast to give us a hand. We're very excited to have a little inspiration from you guys this week. So listeners, if you've been tuning in all week you know it's Interns Ask Week. Eryn's on today's tech show because I thought she had a really awesome question. Very Foolish. Eryn, would you mind reading it for our listeners?
Ratcliffe: Of course. As younger people, we are usually the first to adopt and be comfortable with new tech products and advances like Instagram, Fitbit (NYSE:FIT), Venmo, and I was wondering how we could better leverage our experiences and our friends' suggestions to research and buy promising tech stocks?
Lewis: I love this question for a couple different reasons. One, I think it's incredibly Foolish. I think the average person can very often think, "I'm just a consumer, I'm intimidated by the stock market, it seems inaccessible to me." The reality is, as a consumer, I think you have a very important perspective on the tastes and trends that are going on, and how businesses are trying to meet them. That's one. Two, I think whether you realize it or not, I think it shows that you are a Peter Lynch-style thinker -- more on that next. And three, it's an entryway to talk about a couple pretty cool new tech trends coming up, and some interesting apps and things like that. When you submitted this question to me, I responded with "I want you to do some homework on Peter Lynch." What did you find? What did you get for me?
Ratcliffe: I'd never heard about Peter Lynch before coming to the Fool, but I did some research like you said and found out that he's a famous investor. He managed the Fidelity Magellan fund from 1977 to '90 and during his time, during his 13 years, the fund's assets went from $20 million to $14 billion.
Lewis: Which is incredible.
Ratcliffe: So impressive.
Lewis: What about his investment ideology? How does he think about investing? What is he known for?
Ratcliffe: He's known for trying to invest in growing underrated and really easy-to-understand companies, and he diversifies a lot in his funds. His three main things that he hammers home in his books and in his speeches are: buy what you know, always do your homework, and invest in the long run.
Lewis: And that's the tie-in there, the buy what you know, right? That is kind of what your question is getting at. The logic here with Peter Lynch-style investing is, this is a business you understand. It's something you can wrap your head around. You don't need someone else to tell you what is going on. It's not this black box that you're staring at, hands up in the air, "I don't know what's up." I think one of the other major benefits to thinking this way is, risks and the competition are going to be very recognizable to you as an investor. So if you have new entrants, new technology, whatever that might be disrupting the marketplace, you'll be aware of it, and you might pick up on it before some other people will, because you're very ingrained in that space. So Eryn, you named a couple different spaces that you had your eye on, some things that maybe came up with you in everyday life, things that maybe you see your friends using. You said Venmo was one of them. Why don't we talk about Venmo and digital payments first? Some of our listeners might not be familiar with it. You want to give a quick couple sentences on what Venmo is?
Ratcliffe: Sure. Venmo is a mobile app which you can do person-to-person payments, with friends or anyone who has the app, and I use it every week for sure -- almost every day -- to pay friends back for bills, or if they bought me something, or even just to split utilities with roommates.
Lewis: You have your Venmo account linked to your bank account, right?
Ratcliffe: Yes, it's linked to my bank account, so if I don't have enough money in my Venmo balance, it draws from my bank account.
Lewis: Interesting. Actually, I use Venmo a little bit differently than you do. I don't have it linked to my bank account, but I basically just paid a big tab one time, had friends pay me back in Venmo, and have been using that balance to settle debts and things like that. But one of the major appeals for Venmo is, I know as a Bank of America user, if I'm transferring money to someone that's outside of Bank of America, I have to pay a 350 ... $3.50 fee on each transfer. Whew, that almost got expensive (laughs). These free transfers are really great, particularly for young folks. Can you give me some rough numbers here on the space that Venmo plays in? What does digital payments look like, and are they one of the leaders in the space? They seem like one of the most recognizable names.
Ratcliffe: They definitely are one of the most recognizable names, but they are a small part of the P2P market in general. The market in 2015 was around $70 [billion] to $90 billion, and Venmo was a small part of that. In 2016, in January, they transferred $1 billion just that month.
Lewis: Wow. Seems like a market that's growing, and they are very well positioned in it, and of course PayPal (NASDAQ:PYPL) owns Venmo. They acquired Braintree recently, and Venmo was owned by Braintree at the time. So Peter Lynch likes where we're going so far, but we got to do our due diligence. We got to do our homework. We got to see if PayPal itself is worth investing in and how Venmo plays into them as a business, to better understand it. So as a portion of PayPal's total payment volume, which is a really important metric for these payment facilitators, it's basically how much in total payments did they facilitate, so if you give me $3 that goes toward that total payment volume. Venmo makes up about 3% for PayPal, so it's contributing but not nearly as much as PayPal's bread-and-butter payment business. I think last year was $7.5 billion; I think this most recent quarter was $3.2 billion. To give you an idea, there's a big pie there that PayPal makes up.
One of the problems right now with Venmo is, they're not really contributing much to PayPal's financials. As we talked about, they're not collecting money on the transfers that you and I make. They're only making money as people use credit cards on the service, and with those, I think their take rate -- which is the cut that they take of a transaction -- is roughly 3%, but that winds up being a very small proportion of the overall transactions on the platform. So given the size right now, relative to PayPal's overall business, and the lack of clear monetization, when you're looking at investing in Venmo via PayPal you really have to say: "Does PayPal make sense as an investment itself?" I have to say, I think it's very compelling. The numbers have been really impressive for PayPal recently. They're looking at like 23% year-over-year revenue growth in the most recent quarter, on the back of 31% growth in total payment volume, and 39% growth in merchant services volume. There's a lot to really love there.
But I think, if you're bullish on Venmo, as you seem to be, you're saying, "What does this turn into? What does this look like?" Basically management has talked about the idea of Venmo now being kind of what PayPal was in the early 2000s. So we are very early on in the infancy here. In a matter of two to three years, they've cited, it can be pretty material as a part of their business. It'll be something that'll be really contributing to the top and bottom lines. So how exactly will that happen is one of the interesting things, and I think some of the things that management has outlined really address some of the pain points that we currently experience as consumers. They've talked about growing out the merchant side of mobile payments, and we were joking before the show, though you are an intern, you are of drinking age, right?
Ratcliffe: Mm-hmm (affirmative).
Lewis: And so I'm sure you've had your moments where you are out at a bar, maybe grabbing dinner and some drinks, and you are then left with the large bar tab.
Ratcliffe: Yes, well I try not to be left with it, but I know what you mean.
Lewis: So you go out with a table of six, everyone has a round or two, everyone grabs dinner. Some bars are nice enough to split the checks individually as credit cards. Some are not. So you look at what PayPal wants to do with Venmo, and pay with Venmo for in-app purchases -- I think that these are opportunities to address pain points for consumers, making it easy for people to split checks, and in that respect I think it's super compelling, and it's something that will monetize what is currently not such a great business for them. It's something that is growing its network, and will be profitable, will be a top-line contributor down the road. But anyone interested in Venmo, that's kind of how you have to look at this business right now. It's a two- to three-year play, and you're investing in PayPal and its core business at the moment.
So we have one more trend that we want to talk about on the second half of the show, but before we do, you'll read here, this episode of Industry Focus is brought to you by Casper. I've always thought that you should spend wisely on the things that keep you on the ground: your shoes, your tires, your mattress. But valuing your shut-eye doesn't mean you have to empty your pockets. I used to assume that I'd need to spend thousands of dollars for a proper night's sleep. Thankfully Casper is revolutionizing the mattress industry by cutting out the costs from dealing with resellers and showrooms, and then passing those savings directly on to the customers. Their mattresses are obsessively engineered, combining spring latex foam and supportive memory foam to create an award-winning sleep surface, all offered at very fair prices that you can buy online and risk free.
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So Eryn, for the second half of the show, we're going to switch gears a little bit and talk about another segment you asked: wearables. A little bit more specifically, fitness wearables. What was the inspiration here? Why is this something that you were asking about?
Ratcliffe: I asked about Fitbit specifically, and more dedicated wearables, because I've seen this trend of my friends, they see someone wearing it, they want one, they want to try it out, see how many steps they take -- it's all about personal goals, and reaching this thing that you want to be able to quantify and can't always quantify. It's an interesting spot to see people try out, and see if they like, and see older people start to adopt it, too.
Lewis: Yeah, I think the wearable space is very compelling, because you have people growing increasingly comfortable with big data, and having their life being trackable, and the benefits of that. I guess I have to ask, are you seeing this in the same light that you see Venmo? Where people are using it a ton, and it's very convenient, and it's becoming a staple in their life, or does it not have lasting power?
Ratcliffe: I think it has less lasting power than Venmo, because the more you use Venmo, the more you want to use it. It is right there; it's already on your phone. Well, you have to download it, but then it's already on your phone, and it makes your life much easier. I feel like with Fitbit, it's one more step you have to take to track your steps or flights climbed. You have to charge it separately, and it does lose its wow factor after a while after wearing it. If you're hitting your step goal every day, then you think, "Do I even need this?"
Lewis: Yeah. I will say, anecdotally, I have seen a lot of friends who have Fitbits and ditched them, or had Fitbits and the bands broke, and then they just kind of forgot about them, and they are just collecting dust there in a drawer somewhere. Have you seen that at all, with anyone in your life?
Ratcliffe: Me, especially.
Lewis: (Laughs) Oh, you're one of them?
Ratcliffe: Yeah, so my band broke, and then I used the other one, and it's going strong, but mine's very old so it doesn't charge very well, and it's hard for me to get the motivation to keep putting it on if I feel ... Especially it's college; I walk to class every day, so I usually get my steps anyway, so I feel like it's not a huge reward for me every day to wear it.
Lewis: Obviously in the consumer tech space, that's probably not something you want to hear. If people are saying about their iPhones, "Yeah, they're nice, and I like them for six months, but I didn't really find myself using them afterwards," Apple would not be having the record-setting sales that they've had in the past couple years for iPhones. So beyond what we've witnessed, consumer behavior wise, I've long been a Fitbit bear. There are some things that concern me about that whole competitive landscape and some of the dynamics at play there. One of the big worries, and this is going to tie back to another old consumer tech story, is the GPS business. There was a period where people loved GPSs, they thought that they were the greatest burgeoning market ever, and then smartphones came in and just wiped them out. I worry sometimes that the same thing will happen in the fitness tracker market.
Ratcliffe: I think it already is. Apple and Android have started integrating apps that track your fitness, and are built in. So with Apple Health, if I had my phone in my pocket all day, which most people do, it will track your steps for you, and you can check it that way, and the miles you've walked. I think it's starting to take Fitbit's spot already, and you can see it. They're losing a little bit of their market share.
Lewis: And beyond just the day to day seeing that, in maybe them being on less people's wrists, or them sitting on your friend's desk instead of on their wrist, something like that -- that proves out in what we've seen from some of the market share data from IDC. As a proportion, they're taking a little bit less of the pie. It's still growing, and they're still experiencing revenue growth, but as other entrants have come into this market, their slice of that pie has gotten a little bit shorter. I think part of the problem there is, you have some low cost producers coming in and taking decent swaths of the market. Like Xiaomi, the Chinese manufacturer, has come in with a very competitively priced fitness tracking band -- I think it's around $15 or $20 -- and then you look at Fitbit products tending to range between your $50 to $60 piece to your mid-$200 piece. If someone just wants to try out fitness bands, they're going to go with something super cheap first, especially if they have the reputation of being something that people don't have a lasting interest in. If they want to try something out and say, "Maybe, maybe I'll use it beyond five months," they're probably going to opt for the cheaper option.
I will say, a lot of this is being reflected right now in what's been going on with them as a business. Seeing some interesting soft investing, some observational stuff that we've talked about earlier. Fitbit is experiencing slower year over year growth with each quarter. Obviously since the company has IPOed, it's been kind of a disappointing performance. I think they're down about 60% since they went public. It's just an example of what you see in real life, what you see day to day, possibly being reflected in business outcome.
Ratcliffe: Definitely, and you're right, you have to do your research afterward.
Lewis: Yeah. I will say, we focus this show a little bit on the millennial market, and obviously we wanted to rope our interns into the show, so it was kind of a youth-oriented show. But I think the truth is that actually a lot of parents have access to the same insights. They can see how their kids are consuming content, the apps and tools that are becoming very large parts of their lives, the brands that they're begging for Christmas gifts, things like that. And these are all little indicators, ways to have that soft investing inspiration, and then of course afterwards go in and start doing your due diligence. But there are plenty of different ways to keep tabs on where consumer dollars are going, and where investment ideas might be.
Ratcliffe: And you should listen to what your kids suggest you to use.
Lewis: Spoken like a true kid (laughs). Well Eryn, thank you so much for coming on the show. Do you have any questions or anything else before I let you go?
Ratcliffe: No, that should do it. Thanks for having me.
Lewis: Awesome, thank you so much for hopping on. Well listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out and say "Hey!", shoot us an email at email@example.com, or you can always tweet us @mfindustryfocus. If you're looking for more of our stuff, subscribe on iTunes or check out the Fool's family of shows at fool.com/podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Eryn Ratcliffe, I'm Dylan Lewis. Thanks for listening, and Fool on!
Dylan Lewis owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Facebook, and PayPal Holdings. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Bank of America and Fitbit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.