M&A activity is heating up in the financial sector. We just learned that Schwab (NYSE:SCHW) is officially acquiring TD Ameritrade (NASDAQ:AMTD) in an all-stock deal, which will create a wealth-management powerhouse with more than $5 trillion under management. Separately, PayPal (NASDAQ:PYPL) is spending $4 billion to acquire deal-finding platform Honey, which could help enhance the shopping experience for PayPal's 300 million users. Plus, we dive into StoneCo's (NASDAQ:STNE) third-quarter earnings and talk about some of the stocks our listeners are buying.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 25, 2019.

Jason Moser: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market each day. It's Monday, November 25. I'm your host, Jason Moser, and joining me today, as always, Certified Financial Planner Mr. Matt Frankel. Matt, how's everything?

Matt Frankel: Oh, it's going just great today. A lot of news to talk about. I'm excited to get into it.

Moser: Yeah, there is a lot of news. I'll tell you, today was like Massive Merger Monday for Market Foolery earlier, and we definitely have some of that news to cover today. Speaking of which, on today's Financials show, we'll take a look at PayPal's latest acquisition. We'll take a look at StoneCo's most recent quarter. We've got plenty more of "The Last Stock You Bought and Why."

But we'll lead today off with the big news of the day, though I think we had the weekend more or less to mull over. It looks like Charles Schwab will indeed be acquiring TD Ameritrade in a $26 billion all-stock deal. Matt, I just hope they don't use this as an excuse to pivot away from those zero-dollar commissions we've come to know and love.

Frankel: I don't think they will. But the key is just how smart of a move Schwab has made over the past month or so. Think about it. They dropped commissions. All the other brokers tanked because they're more dependent on commissions than Schwab was. Just to give you the numbers, Schwab only relied on commissions for about 3% to 4% of its revenue, even before the drop to zero. TD Ameritrade, it was closer to 25%. So all the other brokers tanked. So Schwab's essentially buying TD for the same price it was trading at before all this happened. They're acquiring their biggest rival and not paying a premium, essentially.

This is going to create the biggest discount brokerage in the world. about $5 trillion worth of assets. Like I said, I do not think they're going to kill the no commissions. Schwab has been very clear when they say this is not a temporary promotion. This is the price, this is how it's going to be. Like I said, Schwab only depended on commissions for about 3% or 4% of its revenue anyway. So it's really tough to make the case to bring that back now, especially because, remember, Schwab and TD Ameritrade weren't the only two to kill commissions. So that would be shooting themselves in the foot competitive-wise, I would say.

Moser: Yeah, more than likely. You mentioned how with TD Ameritrade, certainly commissions were a bigger piece of the pie for them. Account fees and net interest revenue are really where it's at for both of these companies, I think, now. But with TD Ameritrade in particular, if you look at account fees and net interest revenue, that made up closer to about 55% of total revenue. So really, that's where the scale play comes in, right? They're making the ultimate long-term bet here in that bringing those commissions all the way down to zero ultimately will keep the account holders they have, bring more account holders in, and ultimately, with those account holders, come all of the money that we have in our accounts. That's money that Schwab will then be able to use to make more money, very much like a bank does. So that really goes to show you the value in getting big here.

I was reading a piece in The Wall Street Journal this morning that I thought was a pretty interesting angle here. It was talking specifically about this deal and about registered investment advisors, RIAs, and their role in this calculus, so to speak. Because RIAs, they are responsible for a lot of the money that is held in deposit there with these big brokerages. They use these big brokerages, whether it's Schwab or TD Ameritrade or others, to do a lot of their transacting. For me, it was understandable in the sense that they feel like, OK, this deal could in theory limit choice. And then, it gives the combined entity, the bigger Schwab, a little bit more power to do what they want, assert their market dominance, so to speak. So it seems to me that with Schwab, there's a big opportunity for them to take this customer-centric approach and make sure they court these RIAs, is to make them feel welcome, to make them feel secure, to make them feel like they're not going to try to pull a switcheroo on them and change the game, so to speak.

Given your experience as a Certified Financial Planner, what do you feel? I have to believe you feel like Schwab is going to look at this as an opportunity to really become more customer-centric. But I don't know.

Frankel: I would think so. I think I remember you saying that you're a TD Ameritrade customer.

Moser: I am, yeah.

Frankel: I am, too. I've played around with their institutional platform, the one for RIAs. I've never actually used it with real money, but I've explored it. Just like their personal platform, it's the most consumer-friendly, easy-to-use platform you can find. Full of features, full of anything you would want. If Schwab can integrate that -- Schwab is about 3 times the size of TD Ameritrade. I personally was surprised to find that out. I actually didn't know that off the top of my head. So Schwab is going to absorb this fantastic platform of TD Ameritrade into its ecosystem. And don't forget, Schwab has a ton of proprietary investment products, more so than TD Ameritrade. There are mutual funds, ETFs, things like that. That's another feature that they're going to be able to bring into the TD Ameritrade ecosystem.

Essentially, I'm thinking of this as a win-win for customers of both brokerages. I'm not talking about the investors, but the customers of Schwab and Ameritrade. Schwab's customers get TD Ameritrade's second-to-none platform. TD Ameritrade's customers get Schwab's proprietary investment products, probably easier access to those; the ability to trade fractional shares, which is a Schwab-only thing right now. So there's features on both sides of each platform. They say integration is going to take about 18 to 36 months from the day this closes, but once everything's integrated, this is going to be a powerhouse platform for individual investors and RIAs alike.

Moser: So what do you think the chances are -- I mean, I haven't seen any clarity in this one way or the other, but remember, TD Ameritrade recently just acquired Scottrade. It wasn't all that long ago. I was a Scottrade customer, and I came over to TD Ameritrade from Scottrade. That required a little bit of work on my part. Not much. They did a pretty good job, I think, of integrating there. But I ultimately moved from one trading platform to another and had to get used to the new interface and whatnot. Given how recently that happened, what do you think the chances are that Schwab maintains that TD Ameritrade interface completely separately for its current account holders? Or do you feel like this ultimately is a play just to merge these two together and make one slick interface that they can maintain?

Frankel: I think their eventual plan is to merge everything together, but I really hope they do it in baby steps. I love TD Ameritrade's platform. It's very user friendly. Like you said, all the Scottrade customers are just getting used to that. It's the highest-rated platform in the business. That's the big thing TD Ameritrade is bringing to the table. If they're smart, they're going to keep a lot of TD Ameritrade's architecture on the site. I don't think they're going to be in any rush. I think the full integration will be toward the later end of that time frame, probably about three years. If they do it in little steps, like integrating one feature at a time, and trying to make sure it blends seamlessly, so people who are used to TD Ameritrade -- I've used Schwab's platform myself, primarily just to see how it works. I greatly prefer TD Ameritrade's. I don't necessarily want to be a Schwab customer, platform-wise. So I'm hoping they let me keep my TD Ameritrade platform for a while and that any integration takes place over a period of years, not months.

Moser: Yeah, I agree with you totally. I logged into my TD Ameritrade account this morning just to see something else entirely, but the yellow banner was already up at the top there, announcing this deal. So I imagine the emails are going to start flooding in, and we'll have to do X, Y, and Z to make sure we have all of our ducks in a row there.

A couple of things real quickly here. It wasn't all that long ago, I remember, on our show, you were sitting there calling TD Ameritrade a winner. This was before the Schwab deal ever even materialized.

Frankel: Yeah, I kind of wish I would have taken my own advice. [laughs] TD Ameritrade was trading at something like $32 a share when I said that. Now it's getting acquired at roughly $51 a share based on the current stock price. I said it because this gives them an advantage over everyone else because of their great platform. Now that commissions are gone across the board, the best platform is going to win. I still believe that. Now I think Schwab inherits that advantage. The zero commissions are not going to have the margin impact that people seem to think. I'm not saying run out and buy Schwab, but I don't think they're going to be a loser on the zero-commission thing. I think, especially now that they're buying TD Ameritrade's proprietary trading platform and educational tools and things like that, I think it's going to be a big win for them in the commission wars. It makes them more appealing than, say, a Robinhood or any of those.

Moser: You sort of answered my next question there. Ultimately, I want to lead into this and explicitly ask you this question. Knowing the success that we have with TD Ameritrade, and knowing that when you look at Schwab -- granted, it's probably a little bit under the radar for a lot of folks -- when you look at the actual metrics, they generate healthy return on assets, around 1.5% today, which is in line with, certainly, bigger peers in the space and in the banking world. This scale is going to make them stronger. It's outperformed the market over the last five years. The question for investors today, given what we know, is Schwab, going forward, going to be a business worth owning? I know you said you're not telling people to run out there and go buy Schwab right now, but are you looking at Schwab today thinking, "This is a bit more of an attractive-looking business today than it was a month ago"? Or are you still on the fence?

Frankel: Oh, absolutely, I think it's a more attractive business than it was a few days ago. But the reason I say don't rush out and buy it, I still need to take a step back and look at it from a stock perspective. Return on assets, things like you're talking about, valuation. So maybe stay tuned for another week or two, and that might be my one to watch. I'll report back on that.

Moser: Well, speaking of big acquisitions. PayPal recently announced a $4 billion mostly cash deal to acquire the deal site ... I don't know exactly how to describe Honey, Matt. I've never used Honey. But it seems like really, at the end of the day, it's helping consumers find great bargains. PayPal has decided that they want to be in that business. They announced a $4 billion deal here to buy Honey. Immediately, the headline number there, $4 billion, sounds like a really big acquisition. And, I mean, it is the biggest acquisition in PayPal's history. But I did want to look at this in a little bit of context. When you go back to 2013, when PayPal acquired Braintree, which also included Venmo among other things, that deal, which I think was $800 million, represented about 2.5% of PayPal's total market cap at the time. This Honey deal, it's a bit more than 3% of the total market cap. It's a big acquisition, for sure. But on a relative basis, it's actually not that crazy.

What are some of your takeaways here with this deal? You like it or you don't?

Frankel: First of all, I trust PayPal's management when it comes to acquisitions. Like you said, they acquired Venmo for $800 million. That seems like a steal to me. If you had to break out Venmo today, I would say it's definitely in the tens of billions of dollars by itself.

Moser: It's working out well.

Frankel: So I have very little reason not to trust PayPal's management when it comes to this.

Having said that, the best way I would describe Honey is like an Ebates or a RetailMeNot, things like that. Kind of a deal-finding platform. The idea here is that Honey right now has 17 million active users, which is a lot for a start-up that has only been around for so long. PayPal has 300 million users that it can integrate this platform to. I see this as a necessary step to stay competitive. The reason I say that is, look at Square's Cash app. Cash app has their Cash Boost offer platform that essentially serves a similar function. It's not a deal-finding thing. It offers deals to members. Right now, one of the things I saw was 10% off at Panera if you use your Cash card. PayPal and Venmo, to my knowledge, didn't have a parallel feature to that.

Moser: I don't believe so.

Frankel: So this brings something like that into PayPal's ecosystem. And it's a stand-alone app. It's built up its own following. It has a proven track record of success. It makes money. Unlike the Cash app's Cash Boost, which Square is essentially subsidizing, Honey makes money -- that rhymes -- by charging retailers a percentage of the sales made with the coupons and deals it finds. The merchants pay Honey to bring business in the door, even if it means less revenue. So it could be a moneymaker. It's already being monetized, unlike Square's version, is where I'm going with that.

Remember, PayPal has 24 million merchant partners. Square has about 2 million merchants in its network. It's a big opportunity to bring those merchants into this platform. Can you imagine even if, say, 10% of PayPal's merchants used the deal platform to get more business, how much incremental revenue that can mean for PayPal?

Moser: It does seem like there's a lot of opportunity out there to monetize this platform. Honey is already, to the extent they came with the 17 million users they have, they're helping those users realize savings. So for PayPal looking to become more a part of the overall transaction, as opposed to just what you might use when you come to the final part of the transaction, when you're checking out, this is certainly one way to go about it. Honey actually has some key partners in companies like Walmart and Booking.com and Etsy and even AliExpress, which is part of Alibaba. It's certainly a name that a lot of consumers out there are very familiar with. Probably less about the 17 million monthly active users for Honey and more about the fact that PayPal is going to be able to incorporate that technology, that part of the transaction, into their universe -- which, as you mentioned, has somewhere in the neighborhood of 300 million monthly active users.

Frankel: Right. That's an interesting point to make. PayPal is paying $4 billion, which is a lot. It's not what Honey is worth today. PayPal thinks it's going to add more value than that to its own ecosystem. It's not that anyone really believes Honey is worth $4 billion today. That's why you're seeing all reactions, like, "PayPal paid how much?" But, it could definitely end up adding that value over time, like you saw with Venmo. Venmo wasn't worth $800 million when PayPal acquired it. It certainly is now.

Moser: Yeah, I think that's worked out. So far, so good. To your point, while this is an acquisition that gives investors a reason to maybe raise an eyebrow, you also have to remember that this is a company with a pretty good track record of M&A. We certainly have to at least consider giving them the benefit of the doubt. I know that I will. And at the end of the day, $4 billion, it is a lot of money, but it's something that they can easily afford. I guess we will see how that plays out. What we want to see is, we want to see more users, and we want to see more transactions. That'll keep the top line there growing for PayPal. That's what we'll be following.

Let's turn now to StoneCo. Not a company that we talk about as frequently on this show, but it's one that we will talk more frequently about, just given the nature of the business and what it does. StoneCo, which is really a pure Brazilian play at this point, is what is known as a merchant-acquiring business. Essentially, it's that link in the payment chain that connects merchants to payment systems. These acquirers make a little bit of money for all of the transactions that the merchants make on their platforms. StoneCo is a business that is developing software and even hardware -- something similar, I guess you might call it, to a Square.

Earnings came out last week, and the market reacted very positively to the news. Stock was up, it finished up 20% on the day. If you look at some of these numbers, I certainly understand why, with an active client base now of almost 430,000 clients, up 83% year over year. Revenue up 62%. Total payment volume going through the network of R$115 billion Brazilian, up 60%. Even the take rate is up 11 basis points. Take rate is ultimately the sum of net revenue from transaction activities and subscription services and equipment rentals and whatnot, divided by their total payment volume. I think there are a lot of reasons why this small company got a lot bigger last week.

What was your takeaway from the most recent quarter there for StoneCo, Matt?

Frankel: Well, you said it. Before we recorded, I was reading through StoneCo's earnings, and I was trying to find something not to like, and I couldn't do it.

Moser: Valuation, maybe, is the only thing, right? I wouldn't call the stock a steal. But, hey, listen.

Frankel: No. Like you said, the active clients, almost 430,000. The real thing between the lines is that they added almost 69,000 in the third quarter alone. That's up from about 50,000 in the second quarter. So not only is it growing 83% year over year, the growth rate's actually accelerating, which is, I think, what the market was happy to see. And not only that, margins are better. The net margin grew by 8.5% year over year to a little over 30%. That's a huge jump in margin. Expenses declined. That's really where the margin came from. Unlike a lot of these American fintech start-ups, StoneCo's cash flow positive. I don't think a lot of people realize that. They have free cash flow of about $10 million this past quarter. It has over a billion dollars in net cash on its books. And, like you said, it's still only in Brazil. Think of this as the Latin American Square, kind of like you compared it to. They're just getting into small business credit -- think Square Capital, but right when it started. That's a new part of its ecosystem. There's a lot of potential in international markets down there. Argentina's a really big one that it could potentially move into, just to name one. This could still be the very early stages. Brazil's a really big country. A lot of Americans think China and India when you hear high-population countries. Brazil is a pretty big population center, and with a pretty big middle class, I should add. So there could still be a whole lot of room to grow here.

Moser: Yeah, I agree with you, particularly in regard to the middle-class emergence there, not only in Latin America but certainly Brazil. It makes me think of some work I had done a number of quarters back on MercadoLibre, which I think most people recognize as the Latin American e-commerce platform. But what they've so astutely done is, they've invested significantly into their own payments platform. So you have MercadoLibre coming into its own there, taking its own portion of the market there. Brazil really is the lion's share of MercadoLibre's business today. When you look at StoneCo, you think bigger picture, this is an integrated financial platform they're ultimately developing. It's going to cover everything from acquiring to banking and credit, like you mentioned just a minute ago. This is going to become more meaningful and obvious as it rolls out in the new year, but it gets me back to this question that I have. Given the size of the company today, still fairly small, even that the valuation seems a little bit stretched, but given the success the company's witnessed today, and given where MercadoLibre is now, closing in on about a $30 billion market cap, I have to at least ask the question, is there a chance that MercadoLibre looks at StoneCo and thinks, "We probably ought to try to bring this company into our universe to own the entirety of this market"?

Frankel: I wouldn't be surprised at that. Another one, maybe Berkshire, should take a closer look. Doesn't a Berkshire already own a big chunk of StoneCo?

Moser: They do, yeah. That's another good point there. They have a little bit more than a 5% stake in StoneCo, which is why I think a lot of folks in our universe, that made them do a little bit of a double-take, because it was a little bit, you could say, out of Berkshire's wheelhouse. I don't think it was Warren Buffett who was necessarily making that investment. Maybe this is a sign of things to come for Berkshire Hathaway and the way that they're going to be investing under a new guard in the coming decades. But, yeah, the fact that Berkshire holds a relatively meaningful stake in this little company, I think, is certainly very telling.

Frankel: Yeah. The reason that Berkshire can't buy an American company like this -- Berkshire doesn't want the American banking regulations weighing it down. But if it acquires a foreign payment-processing company, that could be less of an issue, potentially.

Moser: Very good point indeed. Well, it was a good quarter for the company, a good quarter for shareholders. Matt, I'm not going to lie, I'm a shareholder myself, it felt pretty good watching the market receive that news so positively. We'll keep an eye on it. We'll keep reporting the quarterly reports for StoneCo. Hopefully we'll see more and more like the one we just saw.

OK, Matt, this is my favorite part of the show here, last stock you bought and why. Our listeners love it. Listeners, you know we want to hear about the stocks you're buying, so keep the emails coming. You can get us at industryfocus@fool.com, or you can hit us up on Twitter @MFIndustryFocus. Let us know the last stock you bought and why.

We got an email from Caroline in New York City. Caroline says, "The last stock I bought was also Shopify, Jason. I'm counting on Shopify to fund my retirement in relatively inexpensive Portugal, baby. I also bought more MasterCard, Square, Etsy, and Visa today. Is my nickname Moneybags McGee, you ask? Why, no, it is not. But I have owned each of these stocks for at least a year or two, and I've also been unemployed this year, taking some time off to hang out in my middle schooler's classroom a lot to coach his cross-country team and figure out what I really want to be when I grow up now that I'm 50." Well, Caroline, I think that you've got a very good start there with some of those names that you are mentioning. Congratulations!

Chris Jones on Twitter, @ChrisJonesPhD. He says, "My most recent stock purchases were adding to Etsy and PayPal and opening positions in" -- Matt, you're going to love this one -- "Green Dot and Shopify."

Frankel: Nice!

Moser: From Stewart Simpson, @therealmrwillow on Twitter. Stewart says, "The last stock I bought was Disney because I'm building a portfolio for my boys, and we wanted in before Disney+ shoots the stock to the moon. Also because we can't go a day in our lives without something Disney." And then Stewart goes on to say in a follow-up that, "The last stock I bought was a share of Disney because my wife got it for me for my birthday." Stewart, happy belated birthday. Great move there for your kids. You're a good father. I agree with you on that one. Disney+ seems like a great service. My kids own Disney, too.

Matt, if you had to buy a stock for your kids today, what would you buy?

Frankel: I don't know, maybe Square. Probably Disney just to get them interested. That's a big part of it with kids, I find. You can buy them the best investment in the world, but if it's not something they care about, they're not going to be that interested in it.

Moser: Not going out there and buying them -- well, I guess you could buy him a share of Berkshire Hathaway and be like, "You know what? Now you own some of Dairy Queen!" That's pretty relatable, right?

Frankel: There you go!

Moser: Well, for all of our listeners out there celebrating this week, we hope you have a wonderful Thanksgiving. It's a short week for us here. We're not going to bring any stocks to watch for you at the end of the show today. Instead, we just want you to take a moment to recognize the people and the things in your life that you're thankful for. You don't really need a Thanksgiving to do that, but you can be very sure that we here at The Motley Fool and at Industry Focus are very thankful for all of you who continue to listen and support us and our merry ship of Fools.

With that said, Matt, I think that's going to wrap it up for us this week. You got any big plans this Thanksgiving?

Frankel: We're having everybody at our house, like we do every year. I'm cooking. [laughs]

Moser: Batten down the hatches, holy cow! What's the go-to dish for you?

Frankel: I've been told I make the best stuffing anyone's ever had.

Moser: Stuffing is good stuff. I share this every year, I have to go ahead and throw it out there -- throw a nice, big fat spoonful of peanut butter in that turkey before you throw it in the oven, and that thing just cooks out nicely, and you scrape up what's left over when the turkey's done, and man, that peanut butter takes on some of the flavor of the turkey. You can mix that in there with your stuffing or your sweet potatoes or whatever. Peanut butter stuffing, I promise you won't regret it.

Frankel: Never even heard of that, I'll have to give that a try.

Moser: Austin, how about you?

Austin Morgan: Never heard of that.

Moser: No, do you have any big plans?

Morgan: We're going to my uncle's house, and then to Kara's parents' house on Thursday. Wednesday, I'm smoking a brisket for my cousins. That'll be hopefully good.

Moser: Tight. Sounds delicious. Well, I plan on eating a lot. We'll go ahead and wrap it up so we can get started here.

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. Today's show is produced by Austin Morgan. For Matt Frankel, I'm Jason Moser. Thanks for listening, and we'll see you next week.