You run to the grocery store to grab a quart of eggnog. As you walk up to the door, you begin to hear the jingle of Salvation Army bell ringers. They stare straight at you, hoping for a donation, but you don't have a dime. You don't carry change any more.
The Salvation Army is getting used to this. Its big red kettles have clinked less and less over the years as fewer people have anything physical to donate, thanks to the war on cash. But this holiday season, the story has a happy ending. The Salvation Army is introducing Kettle Pay: Simply scan the code and donate via Apple Pay or Alphabet's Google Pay.
We call it the war on cash, but perhaps it could also be accurately referred to as the digitization of commerce. And just like traditional commerce, you can invest in the war on cash from multiple angles. With that in mind, Mastercard (NYSE:MA), PayPal (NASDAQ:PYPL), Global Payments (NYSE:GPN), Square (NYSE:SQ), and Alibaba (NYSE:BABA) are my top five war-on-cash stocks going into 2020. Read on to the end to learn which is my top pick.
1. PayPal and 2. Mastercard: The war-on-cash toll roads
When a digital sale happens, it's kind of magical on the consumers' side; few actually think through the mechanics. But underneath every swipe of a card or click of a button is a very real network that makes the transaction go through. Three of the top payment network companies in the world are PayPal, Visa (NYSE:V), and Mastercard.
You can think of a payment network like a toll road. It is fast, efficient, and convenient, but these companies charge the seller a small percentage fee (the toll) for every transaction. So the goal is to have more and more traffic on the road, or in this case, total payment volume (TPV). Over the last 12 months, TPV for PayPal, Visa, and Mastercard is up 27%, 9%, and 14%, respectively.
Value investors might look at the above chart and wonder why American Express and Discover Financial Services aren't superior war-on-cash investments since they have significantly lower price-to-earnings ratios. The answer: While consumers may think of all these companies the same way, American Express and Discover are actually in a very different business. They are lenders, issuing consumers' credit and collecting interest payments. While PayPal has a lending segment to its business, Visa and Mastercard do not. The vastly different P/E ratios are warranted since these aren't apples-to-apples business comparisons.
Mastercard is a top war-on-cash stock for 2020 because while payment volumes are up 14% over the last 12 months, international payment volumes are up 16%, and cross-border payments are up 17%. This is particularly significant because 70% of Mastercard's payment volume comes from outside the U.S., compared with 54% for Visa. In other words, Mastercard's payments volume is growing fastest where it matters the most for the company. That trend makes it a strong candidate heading into next year.
2020 is also a great time to buy PayPal in the wake of its $4 billion acquisition of Honey Science. The browser extension that Honey provides helps online shoppers save on purchases, and allows merchants to convert more sales -- a win-win. And although Honey only had around $100 million in annual revenue at the time of the acquisition, it was already profitable, which is almost unheard of for a young technology company.
Honey has 17 million monthly users and a network of 30,000 merchants, versus 274 million users and 24 million merchants for PayPal. Depending on how the company chooses to leverage Honey's platform, Honey's benefits could become a standard perk for PayPal users -- both consumers and merchants -- truly differentiating PayPal from its competition. Management expects Honey's acquisition to be accretive to earnings starting in 2021. That means investing in the company in 2020 (before the acquisition begins to pay off) could be a timely decision.
While investors could certainly do worse than Visa, I prefer both Mastercard and PayPal going into 2020. Mastercard's international growth of 16% is far superior to Visa's 9% international growth. The majority world is still largely driven by physical cash and presents a major tailwind as those countries move more toward digital payments, positioning Mastercard to capitalize further. With PayPal, I see far more upside potential to grow volume than a more mature Visa. For Visa's fiscal 2019 (ended June 30th), payment volumes for Visa were $8.6 trillion. Trailing 12-month payment volumes for PayPal were $676 billion -- still just 8% that of Visa.
3. Global Payments and 4. Square: The digital network on-ramps
If PayPal and Mastercard are the best toll roads, we can think of these next companies as the best on-ramps. While the war on cash is digitizing commerce, we are still real people needing a medium to go between the physical world and the digital payment. Companies like Global Payments and Square operate in this area, allowing businesses to accept digital payments, whether through a physical point-of-sale (POS) device or with POS software.
Why is Global Payments a top war-on-cash stock to buy in 2020? In May, the company reached a $21.5 billion merger agreement with rival Total System Services. Besides growing Global's market, the merger also looks to make the company more profitable. In three years, it expects to be saving $325 million annually from the merger. But management says it's actually ahead of schedule with the integration, which could help send shares higher if Wall Street is surprised with any upside in the coming year.
The year 2020 is also a great time to buy Square, as it grows in popularity with both businesses and consumers. On the business side, larger companies (those with annual sales of over $500,000) are an increasing percentage of Square's clientele. Two years ago, these businesses represented just 16% of payment volume. As of Square's most recent quarterly report, large businesses make up 24% of payment volume -- a strong indicator that Square's platform is a real business solution and not just a small-business alternative.
On Square's consumer side, there's the Cash App. While revenue that's specific to the Cash App isn't revealed by management, it's recorded in Square's subscription and service-based revenue. In Q3, the segment's revenue was up 68% year over year.
The chart below shows that, while Square's revenue growth continues at a healthy pace, the stock trades at a discount from price-to-sales and P/E valuation metrics, which sets up an opportunity in 2020.
An intriguing aspect of the war on cash is that, with digitization, every transaction becomes a data point. Leveraging big data, I believe, will be a trend that defines the next decade for all businesses. Retailers will need to analyze data from all transactions to stay competitive. For example, Cardlytics has already carved out a niche of working with banks to use transaction data to offer better-targeted advertising content.
A big part of Square's service already consists of data analytics for businesses. The ability to track sales, manage employees, and establish direct customer relationships are part of why a business might consider using Square to begin with. And in Global Payments' third-quarter earnings call, management mentioned that data analytics will be a focus next year.
5. Alibaba: The war-on-cash vault
Traditional banks have provided an important service for centuries: a safe place (a vault) to store money. Even in the digital world, we need a place to store money, and we need it to be safe. The former is incredibly easy, with fintech companies seemingly sprouting up every day. Security, however, is getting more complicated.
A physical bank vault has limited access. But your digital finances and identity can be attacked from any basement computer. Companies like Ping and Okta operate in this security space, and Apple Pay gets an honorable mention for facial recognition authorization. But long term, I believe the most promising technology for digital financial security is blockchain. Its uses extend to so much more than cryptocurrencies. It offers an unchanging record that, in theory, no one person can control.
Many technology companies and financial institutions are working with blockchain, in part because it is so secure. For example, JPMorgan Chase now has something called the Interbank Information Network, with hundreds of banks signed on. It's built on the Ethereum blockchain and allows international peer-to-peer payments to happen securely. In other words, blockchain is already being used by credible businesses on real-world problems.
Alibaba is a clear leader in blockchain technology. Patent figures vary depending on where the patent is applicable, and whether a company has merely filed an application or been granted a patent. But research by patent preparation firm Harrity & Harrity shows that Alibaba has applied for more blockchain-related patents worldwide than any other company. To be sure, Alibaba isn't making any money with blockchain at the moment (except for offering blockchain as a service through Alibaba Cloud), but developing blockchain technology is crucial for the future of digital security.
While Alibaba's future with blockchain is admittedly a bit speculative, its current operations in the war on cash are not. The company now has over 730 million active annual consumer users across many different e-commerce platforms. And an option for all is Alipay, which is approaching 600 million users -- more than double that of PayPal -- making it essential to any discussion of the war on cash.
Investors are leery of any Chinese stocks due to the ongoing trade war. Even though the company's third-quarter revenue grew 40% year over year, the stock currently trades at just 23 times forward P/E. But I don't believe the trade war will go on forever, and a truce could be reached very soon. The current uncertainty allows investors to buy this stock today at a discount going into 2020.
The top choice
Even though I like all five of these war-on-cash stocks going into 2020, Square is my top choice. There's so much about this company that we didn't even talk about, like neobanking (100% digital banks), stock and bitcoin purchasing, and lending. Approach the war on cash from nearly any angle, and you'll find Square looking to do business there. With its shares down around 20% from 52-week highs and over 30% from all-time highs, now might be time to pull the trigger. Ten years down the road, I'll bet you'll be glad you did.