It was a big week in the financial industry, as the massive Money 20/20 conference in Las Vegas produced some big announcements. Goldman Sachs' (NYSE:GS) Marcus division announced that it plans to offer investment management solutions for everyday Americans, Amazon (NASDAQ:AMZN) and American Express (NYSE:AXP) announced a major partnership, and more.
A full transcript follows the video.
This video was recorded on Oct. 29, 2018.
Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, October 29th. I'm your host, Jason Moser. Joining me in the studio today is certified financial planner Matt Frankel. Matt, you are back from Las Vegas, in South Carolina. I hope it feels good to be home!
Matt Frankel: It does! It's always fun being away for a few days, but then I start to miss my kids, sadly. I don't like traveling as much as I used to.
Moser: I hear you, I feel the same way. It's always nice to get back to the family at home. It was a good weekend all the way around, right? Your Gamecocks took it to the Tennessee Volunteers, Wofford Terriers won, and hey, listen, congratulations Boston Red Sox! That was an awesome World Series win right there. I was happy to see that!
Frankel: And my Philadelphia Eagles won in England.
Moser: Oh, you're an Eagles guy, huh?
Frankel: I am! New Jersey, born and raised.
Moser: Good! On today's show, we're going to talk more about earnings. We'll tap into Twitter, of course. And we'll have One to Watch, as always.
We're going to start the show today with money. By that, I mean the Money20/20 show that Matt attended last week in Las Vegas. He was there working nonstop for us to get a lot of great information. He had some interviews, really a lot to get to. Let's go ahead and kick it off with a story we talked about before, the UltraFICO rating. We know that FICO (NYSE:FICO) was looking to add this UltraFICO rating, which was going to take into consideration the way people manage their checking accounts and savings accounts, and incorporate that into their credit score. The first inclination for both of us was to look at this with a little bit of skepticism. Matt, you were able to speak with some folks out there at the Money20/20 show. Tell us a little bit more about this UltraFICO and what you learned.
Frankel: I had a long conversation with the head of scores at FICO. They shed some light on some of this. This is designed to help two key groups. First is younger people or people who may not have much of an established credit history. For example, if you've never used a credit card, you've never gotten a mortgage, you might have either a terrible FICO score or no FICO score, depending on how little credit you've used. That's somewhat unfair to customers like that. Under traditional means, we have no way of assessing how well they handle their money. That's group one. Group two are people who are rebuilding their credit. It's not people with bad credit, but people who have had a couple of dings a few years ago, maybe, and now are just getting back on their feet and need an extra boost to show how they're behaving lately.
To be clear, one thing FICO shared with me is that the vast majority of this formula is still going to be the traditional FICO reporting metrics, such as your payment history, the amounts you owe on your accounts, the length of your credit history, and so on. For people with bad credit, this isn't going to make the difference between getting approved or not. If you have terrible credit, you're still going to have terrible credit under this UltraFICO score. It's meant to give a boost to people in those two groups who, for one reason or another, the regular FICO formulas may not reflect their real credit risk.
Moser: That's a good point there. I think about the common observation that when you're a student, maybe 18-20 years old, you probably haven't had a chance to develop any kind of a credit history because you haven't had the need to borrow for a car or a house, or perhaps respond to a credit card solicitation in the mail. If this is something that they can use to actually help establish someone I mean, that makes sense. If you're going through pretty reliable data there, the way someone might manage their checking account and/ or savings account, you do have to know how to balance those books to make sure you're not overdrafting the account. So that's actually a good thing.
One thing I also saw this morning, I noticed, is that Capital One Financial and Discover Financial Services both seem to be pulling back a little bit on credit offerings. Essentially, both companies noting that right now, it seems like everything is looking pretty darn good. Consumers are feeling confident, unemployment is low. This is a great, great time to be out there making some money and spending it. But they're thinking a little bit forward. Really, this is more from a risk perspective. They're trying to keep a lid on this thing getting out of control. Perhaps that UltraFICO can help out, as well.
Frankel: Yeah, definitely. And it's not just overdraft history. They told me there's actually a lot of banking information considered in this. Savings behavior is one thing, whether consumers have had a steadily growing average balance for the past few years, things like that. They say that the data really backs this up, that these behaviors that they're going to be looking at really do predict financial performance. They also said that they have a ton of financial institutions, both big and small, that are very interested in this to expand their prime lending base.
While I'm still approaching this with a healthy level of skepticism, in terms of, will it increase default risk, it definitely serves a purpose, I could say after talking to them.
Moser: That's good. It's nice to see both sides of it.
Goldman Sachs Marcus. Apparently, they are looking to try to help consumers and/ or businesses manage debt a little bit more wisely. You had a chance to take a look at this is Marcus offering that they have, learn more about it. Tell me your takeaways with Goldman Sachs and Marcus.
Frankel: The wealth management offering that they're coming up with is still very much a work in progress. I spoke with one of their executives. He said that it's not just going to be a robo advising platform. It's definitely going to have some sort of active component. Then I asked him more in depth where Marcus is going. They had mentioned a bunch of possible growth avenues -- say, mortgages, auto loans, checking accounts, things like that. He said that even though they have the capital and the ability to grow as fast as they want to, they're still just going to focus on their core businesses that they've had so far. Those are online savings accounts and personal lending, both of which they feel have tremendous runway still. They shared a couple of stats with me. 70% of people in a recent survey don't know that you can pay off credit cards with personal loan proceeds. About 60% don't know what their savings account interest rate is. They see a big opportunity with just educating the consumer and building up the products that they already offer, and they're going to cautiously roll out new products as they see fit. Wealth management is just the next avenue.
While other things like mortgages, credit cards, things like that, could be coming in the future, I wouldn't count on seeing any kind of accelerated timetable. You have to realize that Marcus itself is just about two years old. As I was talking to them, on that day, they were celebrating two years since their first personal loan was issued. They're still a very young platform, and are still trying to establish their core competencies, and aren't really inclined to grow that fast.
Moser: I think I can get by that. One thing that always takes me a bit by surprise is, when you look at the bigger picture, a lot of people out there don't understand how finance works. From something as basic as a checking or savings account to taking out a loan, or even what your taxes are going toward, how much you pay in taxes, filing taxes every year. I've done a lot of research on this through the years. I had the good fortune back in 2012, to interview then-Secretary of Education, Arne Duncan. He agreed, the biggest hurdle to clear in regard to individuals in the United States in finance, is simple education. States aren't doing a good enough job of it through school systems. It's not something where you can just say, "We're going to implement this nationwide financial literacy program. That'll take care of it." My observation as a father and through what we do as employees here is, it really all does start in the home. The biggest problem there is when you're a parent you don't know enough to teach your child or children about those basic financial concepts, then you're really stuck. It certainly sounds like Marcus is leaning more toward the education side, and helping people make smarter decisions. I think we can all get behind that.
When we look at this next topic, this is one that you and I both support, no question. For whatever reason or another, we just don't see as many women in money and finance as you would think. If you listen to LouAnn Lofton, she wrote a terrific book about Warren Buffett, how he invests like a girl. I recommend anyone out there who hasn't read it to check it out. LouAnn is a longtime favorite of ours here at the Fool. The bottom line is, women are really good with money, really smart with money. It seems like we should have more in this profession. But for whatever reason, we don't. You had the opportunity to interview the Money20/20 president, Tracey Davies. Talk to me about what you learned.
Frankel: Ms. Davies is really trying to push for inclusion on all levels, they're just trying to start with gender. It makes sense, women are the biggest minority pool out there with 50% of the population. Finance is an industry that generally has not been very inclusive traditionally. If I asked everybody who's listening to close their eyes and think of an investment bank's boardroom, you're probably picturing a bunch of old white men sitting around a table. There's a reason for that. Historically, that's been the case. Over the past couple of decades or so, they've done a very good job of becoming a more inclusive industry as a whole. But we need to do better.
Mr. Davies shared with me that only about 20% of leadership roles, meaning executive positions in the financial sector, are held by women. Only about 20%. They're starting what's called this Rise Up Initiative. The way she described it was an accelerator for ambitious women who want to get their start in the financial industry. Basically, they apply to this program, they go to the Money20/20 conference that I was at. They're in this program, and they have very great, unprecedented, one-on-one access with leaders, both male and female, in the financial industry, seminars. One was called Ascending to the C-Suite that I saw. It's a very intimate program, only 30 people this year. They're planning on expanding it somewhat, but still keeping it pretty small.
It's really nice to see these initiatives. Like I said, they're only starting with gender. They're planning on embracing all kinds of inclusiveness. This program was in its first year, and she said they had too much interest, which is a great problem to have. It's really nice to see. Like I said, the financial industry has been doing great, but we have to do better with being inclusive. It's really nice to see them taking a step in the right direction.
Moser: I agree 100%. Speaking as a father of two young daughters, I get excited when I think about the opportunities that they're going to have as they get older. They both always tell me they want to work at The Motley Fool. [laughs] I think they see how much fun I have at my job, so they figure, hey, why not? And I want that possibility to exist. I want them to have the world at their fingertips.
Another great advocate for women in finance, Sallie Krawcheck. You can follow her on Twitter @SallieKrawcheck. She's also the founder of this platform, Ellevest, which is essentially women in finance. It's the same basic message. It's giving women a place to learn more, to be more, to grow more, to take advantage of the opportunities out there. Certainly something we can all get behind. We look forward to the opportunities to bring more women in finance to our ranks there at The Motley Fool. That's great, I'm glad you had the chance to speak with Tracy out there.
Frankel: Actually, before we go on, she asked me to share her email, if any of our listeners might be interested in the Rise Up program.
Moser: Absolutely! Yeah, please give us that!
Frankel: Sure. It's email@example.com.
Moser: Terrific! Excellent! Hopefully we have some listeners out there that can reach out and learn more. Green Dot (NYSE:GDOT), probably a company that not a lot of folks out there have on their radar, but it is a publicly traded company and it's actually been on the public markets for a little while. I do remember looking at this company when it first went public, Matt. There were some questions I had in regard to the total market opportunity and the trends of what they were pursuing. You made a point here in that they're targeting the group of consumers that are most likely to still use cash. What were the takeaways from your time learning about Green Dot at the conference?
Frankel: Green Dot's oldest and most visible business, they've been around for 20 years now, are prepaid debit cards. Particularly if you ever shop at Walmart, those prepaid money cards that are at the checkout, those are all Green Dot products. That's what they're known for.
They also provide a checking account product for people who don't have a traditional checking account. They're also really emphasizing what they call their banking as a service platform. If you're a company that needs, say, a peer-to-peer payment app, or something like that, it's really expensive and in most cases undesirable to actually become a bank. We've heard some talk about maybe Amazon offering a banking product. Amazon will never become a bank. They may partner with a bank to offer the Amazon-branded checking account, but they're not going to become a bank. They don't want that regulatory oversight, the costs associated with it, things like that.
What Green Dot does is let companies piggyback off their infrastructure and their technology to offer the piece of banking that they want to, and not become a bank. To give you a couple of examples, Uber allows their drivers to have payment accounts where they can get paid whenever they want to do from their ride. That's powered by Green Dot's infrastructure. Apple Pay Cash, the peer-to-peer platform on Apple, is powered by Green Dot. Turbo Tax's pre-loaded debit cards with tax refunds are powered by Green Dot. Companies that need banking products and services, but don't want to become a bank themselves, use Green Dot.
And like I mentioned, these are the customers who are most likely to be the last holdouts of the cash economy. People with an American Express card and a Wells Fargo checking account, like me, I use card or mobile payments for most purchases now. People without those things are the most likely to use cash for everyday purchases. When we're talking about war on cash investments, Green Dot is a really interesting play, because they're targeting the people that use cash the most. They have a huge addressable market there.
Moser: That's always nice to hear. That's one of the things we look for in all of our investments, huge market opportunities. It sounds like Green Dot certainly still has one.
Lastly, we want to talk a little bit about American Express tying up here with Amazon. If I'm reading correctly, this is primarily a business relationship from what I can see. The one thing that I found noteworthy was, it didn't look like there was any type of annual fee involved with this relationship. American Express is pretty notorious for that annual fee. Talk a little bit more about the American Express and Amazon tie-up, and what exactly that's going to mean for both companies.
Frankel: This was actually probably my favorite announcement there just because I'm a huge Shark Tank fan, and Barbara Corcoran was the spokesperson giving this announcement.
Moser: It's a good show, I like it too!
Frankel: On a personal level, I really enjoyed this announcement. You're correct, it's a business card. This is not a personal credit card product. And yes, it's no annual fee. But the most unique thing is that cardholders have a choice -- on one hand, Amazon Prime members could choose to get 5% rewards on any Amazon purchase, including Whole Foods; or, they can choose to have 90-day payment terms. What's really unique about this is, this is not just 90-day interest-free payments. This is 90 days of no payments, meaning that you charge something, and you're billed without any interest comes due in 90 days.
This is a really big benefit for businesses that have cash flow issues. Let's say you sell something to somebody. You need to finance the cost of goods to make whatever you're selling, but then you're not going to get paid for a couple of months. This really allows you to manage your cash flow so much better without that extra expensive credit card interest, or any payments due at all, until your receivables come in. I don't know of any other credit card that has zero payments for 90 days. There's a lot of interest-free credit cards, but you're still to make minimum payments along the way.
That was the big takeaway I saw. And, it's a no annual fee product, and 5% cashback if you choose that route. It's a great rewards rate for a no annual fee credit card to begin with. There's a couple of big perks to this for small businesses.
Moser: That's a couple of really a behemoth companies in the space, and it looks like they're tackling what is a problem with a unique and compelling solution. I have to believe that they should gain a little traction with that.
Matt, one more thing here. I know it was busy week for you, obviously. You had a lot of stuff. You're probably still digging through all your notes. You've got at least one article coming out here soon with a lot of your Money20/20 observations, right?
Frankel: Yeah, I actually have two. I have a Green Dot article with a deeper dive into that company, which should be out tomorrow. Then there's an interview article with the head of brand for Marcus. I'm waiting on a couple of quote approvals from them just to make sure I quoted him correctly because I can't read my own writing in a few cases. So there's a small delay on that. But it should be out any day now.
Moser: Great, good stuff. We'll make sure we get that tweeted out on the Industry Focus feed, so all of our listeners can get a chance to check it all out.
Let's take a moment and look back at the week that was in earnings. Earnings season is still going strong. We had a few companies that we keep on our radar here that announced last week. We'll go ahead and open with Visa. I'll just give you my quick takeaway looking at it. You don't really want to read too terribly much into what this company is doing because it's kind of an "if it ain't broke, don't fix it" situation. If you look at Visa, payments volume was up 11%. Transactions were up 12%. We talked about this before, they did raise the dividend prior to the announcement. I for one have been critical that they should raise their dividend more when you look at the amount of money they've spent on share repurchases vs. what they've given shareholders as dividends. But it's still working out either way. They're bringing the share count down. What stood out to you in the quarter?
Frankel: Well, a 34% jump in earnings. A lot of that is tax reform, but not as much as you might think. The 12% boost in revenue that you just mentioned was really what stood out to me. That's with some foreign exchange headwinds, as well. That's the impressive growth. The revenue growth is the really impressive thing to notice with pretty much all of these financial earnings since we're still less than a year in from tax reform.
Visa is still growing at a double-digit rate. They're anticipating growing at a double-digit rate. That's another company I had a chance to briefly speak with at Money. They couldn't stop talking about how much untapped opportunity there is, especially in overseas markets. They mentioned something like 70% of transactions still take place in cash. If you think that the card market is getting saturated, think again. There's still a lot of runway here.
Moser: I'm sure I've mentioned it before, but in the time we lived in Egypt for three years in the early 2000s, and then onward in Kazakhstan, those were two economies that ran so much on cash. They just didn't have that infrastructure yet. When you look at it from a global perspective, you certainly do understand the opportunity that still exists, how many dollars are flowing through those networks today and how many will be flowing through them in the next 10 years. It makes companies like that so attractive.
Silicon Valley Bank, a company that most of our listeners might not be as familiar with, but you are familiar with it. Tell me what your takeaways from the quarter were.
Frankel: They beat on earnings, but the stock plunged right after the report. It kind of looks puzzling at first, but when you dig into it, this is a bank that has been a beneficiary of the booming economy of start-ups and things like that in Silicon Valley. Because of their relationship with all the start-ups and venture capital out there, they get a big low-cost deposit base, which has been growing rapidly. This quarter, the deposit growth was just about 2%, which is not as good as investors were hoping for. Interest margins, because they have a big low-cost deposit base and rates are rising, everyone wanted to see margins expand a little more than they did. I think they only expanded by about three basis points. While on the surface, it looks good, and the bank is still growing at a pretty impressive level, the numbers just weren't quite what investors were looking for.
Moser: It happens. That happens.
Frankel: It does.
Moser: Another one, I got a few questions on Twitter last week about this one, so I want to make sure we give it a little bit of attention. Ellie Mae, a company I'm a big fan of, I know a lot of our members and listeners are fans of it, too. The stock just got shellacked after earnings came out last week. It fell somewhere in the neighborhood of 17-20%. I think this is one where the bark was much worse than the actual bite. I don't think things are nearly as bad as that sell-off would have you believe.
With that said, what we're seeing play out is one of the biggest risks that we called out investing in this company. Ellie Mae, being the mortgage software provider, has really benefited from this huge stretch of low interest rates, where people are refinancing, it seems like, on an annual basis. With rates starting to go back up, the refinance volume is drying up. They need to make up for that lost volume on the purchase side. But of course, purchases are only going to take care of so much here.
Management guided back on full year revenue guidance. They guided back on the actual number of contracted seats that they see filling out for 2018. Those clearly aren't good things. They tell us that things are slowing down a little bit. But, by the same token, they actually gained 1% in terms of volume expansion in the face of a market that was down 13%. They're maintaining and actually picking up a little bit of share in what is a very tough market. They do see the housing market getting a little bit better in the coming months going into spring of 2019. I think one of the biggest challenges right now is a lack of inventory out there for entry-level homebuyers.
But the bottom line is, when you look at the actual business itself, they're continuing to do good things. They're growing the active users, they're closing more loans, the revenue per closed loan is on the rise. These are all good things. I think we're witnessing a bit more of a macro thing as opposed to a business thing.
If you don't own shares of Ellie Mae and you always wanted to, I think this is probably a good opportunity to at least take a closer look. For full disclosure, I own shares of Ellie Mae. I didn't sell them, I'm not going to sell them. I love this business, I want to hang on to them. Definitely some macro concerns that are going to play out on these guys for the coming quarters.
The big risk is, did they get everything out there this quarter? Or are they going to guide down again in a quarter or two to come? Hopefully they threw out the kitchen sink this past quarter. But it's always possible that they come out next quarter and things don't look quite as good as maybe they'd hoped, and they guide back down again. If that's the case, the stock may see tougher days ahead. But it's a good business, it's a growing business, it's a profitable business, it's a cash flow positive business. A lot of good things here. They're clearly building a platform that their customers like and are using, so I wouldn't get too worked up over it. It wasn't the greatest quarter in the world, but it wasn't as bad as the market would have you believe.
There we go with earnings.
Let's take a look here really quick, I want to tap into Twitter, as we do every week. Always some good stuff out there being said and questions being asked. I'll look here first @Cricket99238. He says, "Wonderful episode, love the insights on Synchrony. Definitely one that I'm going to watch closely. Thanks for the education." I think you really caught his attention there with Synchrony, Matt. Good job!
Frankel: Glad to do it! That's another company I met with at Money20/20. By the way, I'm convinced that Vegas is the most cash-friendly city in America. Ironic that they hold a payments conference there. People can't gamble with cards, so everybody has cash. All the businesses there just use cash. Cash is everywhere in Vegas. Ironic that they have a cashless payment conference.
Moser: [laughs] Last week, we had a lot of volatility in the markets. On October 26th, long-term investor @GBP_HS said, "On days such as these, one needs all three of cash, courage, and conviction. If any one of the three is missing, the correction will be a wasted opportunity." I couldn't agree more. Always nice to have some dry powder, but it does you no good if you don't have the courage and conviction to actually hit the buy button. Make sure you have a watchlist there with the companies you really have high convictions on so that when we have these -- let's face it, it seems like these corrections are happening really quick. A couple of days, you'll see some volatility, then the next couple of days, it's back on the way up. Be able to take advantage of those down days because you don't know how long they're going to last.
Rick Zabrowski, @RZabrowski, I call him Dr. Rick. He's a good tweet. He said, "I've been investing for 30 years, buying on dips. Biggest mistake was selling anything. I now have numerous 20-plus-baggers and dividend stocks paying 20%-plus based on my initial cost. Buy and hold also means I'm diversified in sectors, size, geography, growth, and dividends. Stay the course." I thought this was a great tweet. You've got a guy out here who's lived it, who's done it. This is a lot of great advice from someone who's seeing the benefits of what he's preaching right here. Thanks for that, Dr. Rick!
Lastly, last week, I had a chance to go on CNBC and talk with them a little bit about some of our favorite payment companies. A tweet here from @Every90Midwest. He said, "The important question: were you wearing pants?" Yes. Yes, Adam, I was wearing pants. For a little backstory there, sometimes here in the summertime, we don't have a dress code here at the Fool, so you can wear shorts. If I'm doing a press spot here or something from the studio here, well, I may just put on the suit top and leave the shorts on. I call that the wardrobe mullet. Business up top, and you get the party going on down below. If they're just shooting the camera from the high level up, there's no reason to worry about having pants on. But I have pants, they're just shorts.
Frankel: I confess, during the summer, I've done the same. [laughs]
Moser: I just wanted to be very clear, I'm wearing pants in one way or another. This one was at their studios, so I most definitely was wearing pants. Good question there, Adam, I appreciate it.
Matt, let's go ahead and wrap it up here with One to Watch, give our listeners something to focus on for the coming week. We still have more companies out there reporting. What's your one to watch this coming week?
Frankel: I'd say mine is Green Dot, ticker GDOT, the one I mentioned. The more I hear about the company, and the more I dig into it, the more I like it as a long-term investment. Nothing particularly newsworthy coming in the next week, it's just the one that's on my radar right now.
Moser: I'm going to be watching out for Fiserv (NASDAQ:FISV) earnings, ticker FISV. I believe those are coming up Wednesday. This is an interesting payments company. I think their customer base primarily is financial institutions. But again, it's finance, it's tech, it's taking advantage of that space and I think playing a big role in the behind-the-scenes nature as opposed to some of those other names that we see in fintech every day. We'll make sure to go through that quarter and have an update for you next week.
Folks, remember, you can always reach out to us via email at firstname.lastname@example.org. Make sure to follow us on Twitter @MFIndustryFocus. While you're at it, why not subscribe to The Motley Fool's newly renovated, very slick-looking YouTube channel? You'll find clips from all of our podcasts in the Foolish family, this one included. Just go to youtube.com/themotleyfool.
Matt, thanks so much for your time today! Thanks for joining us! Really great stuff from Vegas. Appreciate everything!
Frankel: Of course! Always glad to be here!
Moser: I look forward to next week. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening! We'll see you next week!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. SVB Financial provides credit and banking services to The Motley Fool. Jason Moser owns shares of Apple, Ellie Mae, Twitter, and Visa. Matthew Frankel, CFP owns shares of American Express and Apple. The Motley Fool owns shares of and recommends Amazon, Apple, Ellie Mae, Fair Isaac, SVB Financial Group, and Twitter. The Motley Fool owns shares of Visa and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.