Fourth-quarter earnings season is now mostly behind us, and three of our favorite fintech stocks have now reported their results. In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP discuss the latest numbers from Green Dot (NYSE:GDOT), MercadoLibre (NASDAQ:MELI), and Square (NYSE:SQ), and what long-term investors need to know about them.
A full transcript follows the video.
This video was recorded on March 4, 2019.
Jason Moser: Speaking of fintech, we had a lot of earnings that have come out recently. We wanted to touch on those here this week. A company that you follow, you've called it out as your one to watch before, Green Dot. Earnings came out. It looked like the stock felt a little bit of pressure from that earnings report. What were a couple of your top takeaways from Green Dot's most recent quarter?
Matt Frankel: The numbers looked good. They beat earnings, they beat revenue. But the guidance was a little bit light. If you've been following it, the stock is down after earnings. It's not that the guidance is disappointing. They're still projecting 10% year-over-year earnings growth, 6% revenue growth. But my takeaway is that, from a short-term perspective, a lot of people don't want to pay 20 times earnings for a company that's growing at 10% in the immediate term.
Moser: Makes sense.
Frankel: Green Dot is ahead of its time in some ways, especially its banking-as-a-service platform. While it's only projecting to grow about 10% this year, that doesn't give credit to the long-term potential of its business. So, as a long-term investor, I like Square -- not Square, sorry, Green Dot.
Moser: [laughs] We'll get to Square in a minute, don't worry.
Frankel: I know, it's on the brain. I like Green Dot after earnings with this new lower price if you have a long time horizon. You might not be happy with my recommendation in six months or a year, but I'm very confident that in a decade, Green Dot will be a much larger company than it is today, especially if it keeps picking up partners like Apple, Uber, and some of the others that it's added recently.
Moser: I think that's what investors want to hear. We certainly never profess to take that quarterly view. We like to look at quarterly earnings and see how the companies are doing, but we're looking at these businesses from the perspective of three, five, 10 years. It sounds like Green Dot still has plenty of opportunity. They're talking about plenty of opportunity.
I'll jump into MercadoLibre here really quick. MercadoLibre was my one to watch last week. While it really gained recognition early on as the e-commerce king of Latin America, this has clearly become a case of an e-commerce business that has become quite an attractive payments business as well. I was talking about this on Motley Fool Money this past week -- when you look at the numbers that are going through MercadoLibre's network, it's really quite impressive. Forget about the e-commerce business for a minute, they brought $5.3 billion of total payment volume through their networks over the fourth quarter. When we talk about how successful that is, what's even more impressive is the offline payments that are going through their platform. If you look at the actual offline payments, they continue to bring dollars that aren't necessarily originated from their e-commerce platform. The total off-platform payment volume grew on a currency-neutral basis 172% for the quarter, which is impressive. For the first time ever, off-platform payments processed more than $2 billion in transactions, reaching almost 70 million payment transactions in a single quarter.
I think that really seals the argument that a lot of us here at HQ have been making for a while in that MercadoLibre is as much of a payments company as it is an e-commerce company. I think that's where e-commerce companies are really succeeding, is being able to become more than just a place where people are buying it, but they're using services like payment platforms and whatnot to keep their customers happy. It's very sticky and it's something that I think will continue to benefit the company for some time to come. So, not surprising that the stock continues to do very well.
Matt, let's pivot over to Square really quick. This is one that you and I both follow. Earnings came out. Kind of a funny reaction from this one. The market initially was selling the stock off. By the end of the day, it seemed to be back in the good graces of the market. What were a couple of things that stood out to you for Square's most recent quarter?
Frankel: First of all, I wish I had bought it the morning after earnings.
Moser: [laughs] Timing is everything.
Frankel: It was a really knee-jerk reaction. The guidance for the coming quarter is a little bit weak in terms of earnings if you care about the profitability of a company that's growing at 65% year over year. But investors quickly wised up to the fact that Square is not about current profitability. It's not about if they're losing money right now. When a company is growing like that and has cash in the bank, who cares? That's my opinion on that.
Some of the highlights I like out of Square's earnings. Obviously, the revenue growth is impressive. Even not including their acquisitions, they're growing at a rate of over 50%, which is huge. Their services business continues to grow to more than double year over year.
The biggest highlight to me is the Cash App users. They only report Cash App users once a year. Last year, they reported that there were about 7 million active users in December 2017. For December 2018, that number more than doubled to 15 million. Now, it's worth pointing out that this is not an area of the business where they're making money yet. Square makes the bulk of its money still from payment processing, small business lending, and things like that. Where this really comes into play is, this could be a huge long-term driver of growth in other areas. Specifically, Square has said many times that it wants to get into the consumer side of the financial industry, offering things like high-yield savings accounts, personal lending, an investment platform, things of that nature. This is an active user base of 15 million people that they could potentially cross-sell those products to who are already part of the Square ecosystem. Just to put that number in perspective, Square's core customer is the small business, and that customer base is about 2 million large. This is a customer base that's more than 7 times their small business customer base that is currently not being monetized. And this doesn't factor in any future growth. I'm pretty confident in saying that next year, when we hear their Cash App numbers, it's going to be a whole lot more than 15 million. So, this is an untapped and rapidly growing source of future revenue potential for the company that I really don't think the market's fully taking into account yet.
Moser: Yeah, I tend to agree. There's a lot to like about the quarter. I continue to be impressed by the opportunity that's in front of them in regard to how many dollars are going through that network on a yearly basis. We were looking at PayPal for 2018, they're closing in on $600 billion flowing through their networks. Square is essentially a tenth of that. And growing at double-digit rates, very similar to PayPal. So, you can see plenty of opportunity there for Square to capture.
Speaking of the Cash App being something that's not profitable right now, we saw much the same thing in Venmo early on for PayPal, when they had the wherewithal to acquire that. That's now becoming a channel that they're starting to rely a little bit more on and work with a little bit.
I'll just speak from personal perspective here. My daughters, we just got them their first phones, and we're looking to create an opportunity for them to have their first quote-unquote "banking relationship." So, we all downloaded the Cash App. We all set up Cash Apps on our phone. It works seamlessly. I can transfer money to their accounts, they can give me cash if they don't want to hold it. I can give them money through their Cash App. We're all very happy users of that Cash App. So we tacked on a few more users there. They'll be able to count us in next year. [laughs]
A lot to like. I like their efforts to figure out new ways to extend capital to their merchant customers. The Square lending side of the business is going to be huge, Square Capital, all of those types of things. Tremendous opportunities. I think we all know by this point that Jack Dorsey certainly is a very long-term, big-picture thinker, not concerned with those quarterly numbers whatsoever. So, yeah, I remain a happy shareholder. It sounds like you do, too. I think that all the folks out there in our Foolish universe who have picked up shares of Square along the way should feel encouraged as well, right?
Frankel: I bought Square for $11 a share and haven't sold a single one yet, if that tells you how confident I am in the company long-term. Even though I could lock in a 600% profit right now if I really wanted to, I'm convinced that this is still just the beginning.
Moser: The only way you get that 10-bagger is by hanging on.