The quick riches made by early speculators in the cryptocurrency gold rush have lured investors into betting billions on digital currencies. But those who see a bright future for cryptocurrencies and digital payments don't have to buy currencies like bitcoin (BTC-USD) to stake their claim.
Many publicly traded companies are indirectly involved in online currencies and the payments industry generally, offering an avenue to profit from the evolution of the business regardless of which token or network is eventually crowned the winner. Three of our Motley Fool investors explain why they believe NVIDIA (NASDAQ:NVDA), Visa (NYSE:V), and Square (NYSE:SQ) are a better way to bet on the future of payments.
A crypto winner with plenty of bonus opportunities
Dan Caplinger (NVIDIA): A lot of investors are making concentrated bets on cryptocurrencies by putting all their money into tokens like bitcoin. There's no reason why you can't make money on the crypto trend, however, without an all-or-nothing proposition. NVIDIA has been a prime beneficiary of the rise in interest in cryptocurrencies, because its graphics processing chips are a key component in the crypto-mining rigs that miners of bitcoin and other tokens use to solve the complex mathematical problems required to create new blocks of cryptocurrency.
Yet NVIDIA's business goes well beyond the crypto angle. Graphics chips are valuable commodities for gaming consoles, desktop gaming machines, and other applications. NVIDIA has tapped into the budding esports industry, where graphics processing units clearly play an important role in ensuring that competitors have the greatest capacity to reach the full potential of their playing ability. NVIDIA chips also power the huge data centers that have become increasingly important in the cloud computing world. And looking further into the future, the company has big aspirations in the artificial intelligence arena, hoping to play a role in everything from self-driving vehicles to machine-based learning. With new initiatives aimed at healthcare, robotics, and the Internet of Things earlier this year, NVIDIA is tapping into every available avenue for growth, and crypto will play just one part in the company's future success.
Better than bitcoin
Jordan Wathen (Visa): The payments industry is constantly changing, but I believe a bet on an established payments company will prove to be a far better investment than a wager on one of the thousands of cryptocurrencies in existence. I like shares of Visa because they offer the ability to profit from secular trends that are driving payments volume and thus Visa's profitability.
First, cash transactions are being increasingly replaced by cards and digital payments all around the world. In most places, it's a simple matter of convenience and consumer preference. In others, it's by government decree. India, the sixth-largest economy in the world, is cracking down on cash transactions to stamp out criminal activity and tax evasion. Visa, which has more than 50% share of debit and credit card spending within India's borders, stands to be a natural beneficiary of the policy.
Secondly, the ongoing shift to e-commerce acts as yet another tailwind for payment networks, particularly Visa. The company previously estimated that about 23% of personal consumption expenditures in brick-and-mortar businesses in the United States flow over its network. Online, however, its share is about 47%. Thus, as transaction volume moves from traditional storefronts to the internet, Visa's payment volume will only grow.
And for all the complaints about the high cost of accepting payments -- a problem cryptocurrencies purportedly solve -- the problem of cost isn't due to the networks like Visa, but the banks and third-party services that charge fees on top of it. Visa booked just $0.31 in revenue for every $100 of noncash payment volume that took place on its network in the most recent quarter, a figure that actually overstates how much Visa earns because about 20% of its revenue is sent back to clients to incentivize more business.
Visa shares trade for around 30 times earnings estimates in 2018, an optically high multiple. But I see a future where Visa can generate high single-digit, if not double-digit, earnings growth, powered by payments growth, margin expansion, and share repurchases over time.
Bitcoin could boost this fintech company -- but it isn't the core of its business
Matt Frankel (Square): To be clear, I'm generally a fan of cryptocurrencies. However, I see the cryptocurrency market playing out like the dot-com market in the late 1990s -- there will be a few winners, many more losers, and there's going to be a lot of volatility along the way.
So, instead of investing directly in cryptocurrencies, I prefer to invest in companies that stand to make lots of money if cryptocurrencies continue to surge in popularity and eventually become mainstream, but that will also do just fine if it doesn't happen.
My favorite cryptocurrency play is payments company Square. The company's core business of providing payment hardware to merchants has tremendous potential to grow, especially in international markets where the majority of small businesses still don't take card payments. In addition, Square has several complementary businesses that are starting to create a one-stop small business ecosystem, such as its Square Capital lending platform, Caviar food delivery platform, and its recent acquisition of Weebly, which should help its customers build their e-commerce presence.
On the consumer side, the Square Cash peer-to-peer payments app is now the No. 1 financial app in the App Store, and its recent bitcoin integration provides a potential long-tailed revenue opportunity if bitcoin evolves into a mainstream payment method. And if it does, Square has a head start when it comes to integrating bitcoin acceptance into its merchant solutions.
However, if bitcoin ends up fading away like some financial industry heavyweights have predicted, Square will be just fine. In fact, I could see the company being one of the market's most impressive growth stories over the coming decades without any cryptocurrency-driven revenue whatsoever. And that's why Square is a smart way to play the cryptocurrency boom.