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Visa and PayPal Show the War on Cash Is Far From Over

By Matthew Frankel, CFP® - Feb 5, 2020 at 5:00AM

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Here’s how these fintech giants did in the fourth quarter.

Visa (NYSE: V) and PayPal (PYPL -3.22%) recently released their fourth-quarter earnings. On this week's Industry Focus: Financials, host Jason Moser and contributor Matt Frankel, CFP, discuss the numbers and what it means going forward. We'll also hear about Berkshire Hathaway's (BRK.A -2.26%)(NYSE: BRK.B) latest investment move and why Jason and Matt are watching Goldman Sachs (GS -1.99%) and Chipotle Mexican Grill (CMG -5.23%) this week.

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 Feb. 3, 2020.

Jason Moser: It's Monday, Feb. 3. I'm your host, Jason Moser. And on today's Financials show, we're going to dig into the latest earnings reports from Visa and PayPal. We'll take a quick look at why Berkshire Hathaway is getting out of the newspaper business. We have more of "The Last Stock You Bought and Why?" Of course, we have ones to watch for the coming week.

And as always, joining me in the studio -- live from Beaufort, South Carolina, this week, enjoying the beautiful weather down there in Beaufort, South Carolina -- it's Certified Financial Planner Matt Frankel. Matt, how's everything going?

Matt Frankel: Pretty good. It's a nice, warm day down here. Hoping you guys are having some decent weather up by HQ.

Moser: Yeah, it is good weather. You know, I mean, it seems like about 90% of the office is actually out of the office today for -- Dan, what do they call this, Super Fool Sunday, is that what it is? It's something like that. He's shaking his head behind the glass. He's not quite sure. But yeah, it's, I guess, just giving everybody a chance to recover from the big game last night, which -- nah! It was a pretty good game, I don't know, did you catch it, Matt?

Frankel: Yeah, I saw a lot of it. I was at a Super Bowl party, but I had my daughter with me, so we left about halftime and then I caught the tail end of the game, but it was a really good ending.

Moser: Yeah, I think the second half was certainly more enjoyable than the first. But congratulations, all you Kansas City Chiefs fans out there. That was one heck of a game. And, you know, I didn't have a dog in the race, so to speak, but I was happy to see Andy Reid get a Super Bowl. I've got a lot of respect for him and I know -- and sure, I know you do, too, Matt. I mean, he was your head coach for so long there in Philly.

Frankel: Oh, yeah. I mean, I wish he would have won it [laughs] in our town, but I was glad to see him win when he deserves it.

Moser: OK. Well, let's jump into the big earnings reports from last week for our purposes here. First up, we're going to talk a little bit about Visa. And, Matt, I'm going to go ahead and let you get it started here. But one thing I did note is that this was the first time in the company's history, the total network volume for the quarter was over $3 trillion. So when we talk about big networks, Visa is definitely a big network.

Frankel: Oh, yeah. I mean, this company just keeps getting bigger and bigger. Just when you think that Visa is everywhere you look, I mean, like you said, just over $3 trillion in payment volume. And they've been doing a great job of turning it into revenue and earnings. So, 10% year-over-year revenue growth is an impressive number for such a huge company and that they turned that into 12% earnings growth shows that they did it very efficiently.

Just a couple of highlights that I was looking at worth noting -- their debit card business is really what's fueling this growth. Their debit card payment volume rose 10% as opposed to just 5% for credit cards. And you thought $3 trillion in total payment volume was impressive -- there are 3.385 billion Visa cards in existence now. That means more than one out of every two people on the planet have a Visa card.

Moser: I mean, I guess, if I look in my wallet right now, I've got an American Express card and I've got two Visas. I've got a debit Visa and I've got a Visa credit card tied to my banking accounts. But yeah, I mean, there are two of them right there in my wallet.

Frankel: Right. And that number is, you know, like you said, it's concentrated in the United States, but I mean, that could potentially even double over the next decade or so as our so-called war on cash rages on. Visa, they just approved another giant share buyback. You know that I'm more of a share buyback guy whereas Jason is kind of, you know, an advocate of Visa and MasterCard maybe raising their dividend a little bit, if I remember our conversations right.

Moser: Yeah, I think if I had to put one over the other, I wouldn't mind seeing the dividends grow a little bit more. But I mean, I also appreciate the fact that they utilize that capital to buy those shares back. And that helps keep that earnings-per-share number going in the right direction too.

Frankel: And I get it, I mean, the dividend yield right now is about 0.6%. Like, why pay anything?

Moser: Yeah.

Frankel: [laughs] What's the point? Might as well just take that and punch it back into the business as well. But just, all-around great quarter. I was trying to find a number that I didn't like in there, and I really couldn't. I think cross-border payment volume grew 9% year over year. Their 2020 outlook actually really surprised me. They're expecting "low-double-digit revenue growth and EPS growth in the mid-teens." Which means that their growth is actually expected to accelerate into 2020. And it's an expensive stock right now. It's trading at almost 40 times earnings, which for such a large company is a big valuation. But I mean, it's really hard to say it's not justified by looking deeper through their numbers.

Moser: Yeah. I was going to say, I mean, it does. We talk about that with Visa and MasterCard all the time -- they always get that premium multiple, but it's really hard to argue against it, right? I mean, these are very reliable businesses, two leaders in their space, and I mean, just tremendous networks that are going to be -- I don't want to say they're too big to fail or impossible to disrupt, but they just have very strong competitive positions. And I mean, when you see businesses like that, we have examples that span all types of markets, those types of businesses do get those premium multiples. And the nice thing about these businesses is, you know, they're firmly profitable. They make tons of cash. I mean, you're paying up a little bit, but there's a reliability there too, right?

Frankel: Right. And we always talk about these disruptive companies; like, we're about to discuss PayPal, we've discussed Square, things like that. And it's kind of worth noting that these aren't kind of, like, competitors in a sense that the bigger PayPal gets and the bigger Square gets, the bigger Visa and MasterCard are going to get. There's the Venmo card -- I'm not sure if it's a MasterCard or a Visa off the top of my head, but there's a Square, the cash card -- all of these have products under the Visa and MasterCard network. Square's Terminal universally accepts Visa and MasterCard credit cards.

So, the bigger these companies get -- PayPal, you can use PayPal with a Visa or MasterCard. So don't think of these as two different plays. There's plenty for all, in other words.

Moser: Yeah. Well, I mean, there's no question there. I mean, we see, with the Olympics coming up here this year -- and I think there's this big push in Tokyo to go virtually cashless, and certainly Visa is a beneficiary there as well. One thing I wanted to ask is, did you notice anything in the call -- I know they made obviously this big acquisition recently with Plaid, paying up a pretty penny for it. But it seems like there's a plan behind it. I do get it at least, understanding what Plaid does. Did you see anything in regard to Plaid, through the release or the call that stood out to you?

Frankel: I mean, this is just more of my personal thing than what I saw in the call. I personally think that's a very hefty price to pay for Plaid. But, I mean, if it does what they want it to do -- I mean, if you're not familiar with Plaid, it kind of helps integrate these different financial apps and things like that. And it's kind of what I was just talking about with the PayPal and Square thing, how it would kind of build a one giant war-on-cash play, if you will, rather than individual competitors. This is kind of, like, strengthens Visa's ecosystem. So it's going to be tough to quantify if they're actually getting their money's worth for the deal. If they're ever able to, it's going to be really tough to do. But, I mean, if it keeps them growing at double-digit rate for the foreseeable future, you could not really argue with their logic there.

Moser: Yeah. And I mean, I think, really, at the end of the day, seeing Visa and MasterCard with a focus on keeping up with the times, bringing more technology into their houses, I mean, that's really what this Plaid deal was, I mean, I think it was another way for them to bring some novel technology that is serving a unique purpose in a number of different markets. And, yeah, so it will be tough to quantify. I mean, one thing I did see that, if you've got a little bit of clarity into Plaid's business model, the usage base model. So, I mean, again, you plug that into Visa's massive network that you were just talking about there, there are certainly some opportunities. So, I mean, it could be meaningful over the years. But I do agree, yeah, I feel like they paid a lot for that deal, so I guess we'll have to wait and see, won't we?

Frankel: Yeah. And as you say, it will be tough to actually put a number on the benefit, but their objective is to keep growing and keep the war on cash story alive. And if it does that, then we're all for it.

Moser: OK. Well, speaking of the war-on-cash story, let's move on to the next earnings story of the week. PayPal earnings came out later in the week. And for the quarter -- I mean, this was another really good quarter from a company that, I think, you and I are both good fans of. Just to go through some of the numbers here, 9.3 million net new active accounts. They now have 305 million total accounts; that's up 14% from a year ago. 3.5 billion payment transactions for the quarter, up 21%. Close to $200 billion in total payment volume, up 22%. And it looks like the transaction take rate is hanging in there. You know, I mean, that's something that the more and more the peer-to-peer or person-to-person payment growth continues, that brings that take rate down a little bit, right? They don't monetize that as well as the enterprise side. But the take rate was 2.27%, the transaction take rate was. The total take rate was 2.49%, just modest declines from a year ago. And that's always good to see.

But I think going back to something you were talking about Visa, one thing that's very clear with PayPal is they are doing a very good job of partnering up, incorporating solutions in the networks all over the world with these big partners. And it's like they -- you know, PayPal was built on technology. It was one of those companies, they were trying to find a convenient and mobile solution for consumers in this world where we're spending less and less cash and making more and more electronic payments. And so, to me, I mean, when you look at PayPal today, mobile is now 44% of total payment volume. And I think, because they've created such a slick interface, with whether it's PayPal or Venmo or even Xoom. I mean, that mobile number is going to continue to grow and I think they're going to find partners out there that are very happy to bring them into their value chain, because I mean at the end of the day, PayPal was creating engagement, don't you think?

Frankel: They are. I mean, they are partnering with some of the biggest companies in the world and some of the highest growth opportunities. Mercado Libre is one of the big ones that they're partnered with, right?

Moser: It is. Yeah, that is right.

Frankel: And PayPal is expecting 35 million new accounts in 2020. That's a pretty ambitious goal. They are bound to add many in 2019. So they're expanding their ecosystem at a fast rate and they really don't have to worry about how unprofitable everything is right now. I mean, if they're adding 35 million users on an annual basis, as big as they are, and Venmo is continuing -- Venmo is up what, 56% year over year?

Moser: Something like that.

Frankel: I mean, it's a big, big opportunity that obviously still has a lot of room to grow.

Moser: Yeah, I mean, when we talk about those partnerships -- I mean, you mentioned Mercado Libre, but just to go through this list, because it really is, when you look at this all in total. I mean, they expanded their relationship with Uber and they're now processing Uber payments in Europe, Brazil, India, and across the Middle East. You mentioned the relationship with Mercado Libre. In December they closed the acquisition of GoPay that helps PayPal essentially become the first foreign payment platform in China. They're cozying up with China's UnionPay; there's a 130 million cards issued outside the mainland in China from UnionPay, and they're going to be a part of that international payment solution for UnionPay. And that's a big deal. I mean, UnionPay is accepted by over 28 million merchants across the globe.

And so, I mean, this is the kind of stuff you can expect to continue. And I think that as long as they continue to do that -- I mean, they're going their user base, they are creating more engagement by more transactions and more dollars going through that network. And you know, you keep that -- the take rate doesn't have to be some exorbitant number for this company to make a lot of money at the end of the day.

Frankel: Yeah, I mean, it will -- and speaking of making money, their margins are actually improving tremendously. Operating margins were up 200 basis points year over year. I mean, this isn't like an unprofitable company. Don't get us wrong.

Moser: [laughs] No, it's not.

Frankel: They're doing a great job of making money but they are accelerating their profitability too in addition to accelerating their ecosystem. So I think we've just kind of begun to see the earnings potential of PayPal. If you look at PayPal's earnings in 2013 as opposed to 2020, I think you're going to be very surprised.

Moser: Yeah, I think you're probably right. One thing I wanted to get your opinion on. We were talking about with Visa and the acquisition of Plaid. We know that PayPal made a big acquisition of their own recently here, and that was Honey. And it was interesting. I mean, they said the word "honey" more times on the call then you would hear in an episode of Hee Haw. But I mean, it was one of those things where I'm not even certain we fully got as clear a picture maybe as what we would like as to how they are going to monetize Honey and how meaningful this could be to the business.

But ultimately, it's all about just making PayPal more a part of the overall commerce relationship, right? I mean, it's traditionally been a payments company; the acquisition of Honey is to make them more a part of that overall commerce relationship, that overall transaction from discovery, to search, to payment. But you know, they paid up for it. I don't know. I mean, if you had any feeling on that deal there one way or the other?

Frankel: Well, it's kind of like how I was just talking about with Visa, like, it's going to be tough to put an actual number on it, it's going to be tough to quantify the impact, and it's tough to justify the price they're paying currently. But having said that, it's a move to get a bigger ecosystem. And if it keeps their growth story going and gives them new avenues to grow, then I'm all for it.

Moser: Yeah. And just to at least put some context around it, they do believe that that acquisition will be accretive to earnings in 2021. So, you know, we can at least look forward to that. And it's not to say they won't make more acquisitions in the future here. I'd suspect they'd probably will, but, I mean, you've got a company here with better than $8 billion of net cash on the balance sheet. Share repurchases are bringing the share count down modestly. But hey, I mean, at least the share count is not going up. And at the end of the day, you've got a company, I think, that is doing everything that we really expected them to do.

And between Venmo and Xoom and PayPal and what they're going to potentially do with Honey, all of these new relationships that they're creating with all of these different partners -- I mean, they've got a lot of pokers in the fire, but that's really one of the most attractive parts about this business is, they're learning how to make their money a lot of different ways in a market that seems to have a lot of tailwinds. And I think we could say the same for Visa as well.

Frankel: Yeah, definitely. I think all these Visa, Mastercard, PayPal, Square, you know, your whole war-on-cash basket, I think has a ton of room to climb. And by climb, I mean, their business itself, not just the stock price. I think these businesses are a fraction of what they're going to be.

Moser: Yeah, I agree. And just to give our listeners here an update on the war on cash, because I was looking at that recently. We've got three of the four holdings in the basket having reported, and Mastercard, and Visa, and PayPal now. Still waiting for Square to come out. But as of today, the war on cash basket is up now 131% versus the S&P's 37%. So, seeing some great results there and just holding off for these businesses for the long haul.

But, Matt, the laggard in the basket -- can you believe the laggard is actually PayPal? Of all four, PayPal is the one that -- you know, I guess, I could say they're not pulling their weight, but the stock is also up almost 100%. It hasn't quite doubled, but it's just on the cusp. So it's not like they're sleeping at the wheel. I mean, it's hard to believe that they're the ones lagging out of the four, but there you go.

Frankel: I mean, I wish my worst performing stock was up almost 100%. [laughs]

Moser: [laughs] Yeah, that's a nice problem to have for sure. Well, I hope that everybody out there has had a chance to get on that war-on-cash basket. And certainly, did want to have a lot of fun following and we'll continue to keep track of it for our listeners.

Matt, let's move on over to Berkshire Hathaway, we saw some interesting news out of Berkshire Hathaway last week. They're selling off their newspaper business. A side of the company that Warren Buffett for a very long time seemed to have a lot of optimization about it. He felt really strongly about the role that newspapers play in our country particularly, but the way that they communicate information at the local level, especially, it seems like he's had a little bit of a change of heart here selling the newspaper business to Lee Publishing, who's been running the shows for those newspapers, I think, since 2018.

And, I mean, it's an inconsequential amount of money for the company. I mean, this doesn't really matter, but whether they made money or lost money is irrelevant.

But I really wanted to ask you in regard to this, just what is the signal? I mean, right. Because the first I saw this, I thought, man, I wonder if this is not another sign of maybe that the impending changing of the guard that we know is coming sooner rather than later.

Frankel: This stood out to me for a few reasons. One, it's because Berkshire rarely sells any of its operating businesses, no matter how big or small. Two, this was actually a profitable business. The newspaper business generated about $15 million of net income, so they sold it for $140 million. That means it was earning over 10% of its value for Berkshire every year. They're also -- as part of the deal -- they're lending Lee $576 million at 9% interest. So Berkshire is not just making $140 million; they're getting a nice, little steady stream of capital.

Moser: [laughs] That's such a Buffett thing to do, too. I mean, I mean that in the best possible way. [laughs]

Frankel: I mean, that's such a Buffett deal. He's really good at making advantageous debt deals, I guess you would say. So that really stood out to me. But it just seems like, if he's willing to sell a profitable business like that and loan money somebody for just to take it off his hands, then he really might think he was wrong about the newspaper business. I mean, obviously, at The Motley Fool, we love the news business, but print newspaper, even with an online presence, might not be as salvageable as he originally thought. So it just seems like this is like a moving-on type of deal. Not like they need the money, as you mentioned -- $140 million is a drop in the bucket for Berkshire. But it seems like they're moving on from it.

Moser: Yeah, I can't help but wonder if Todd or Ted or Charlie or some combination of the three weren't behind this at least somewhat. I mean, maybe he could have very well just woken up one morning and said, "You know what, we just need to change tack here." But I do wonder if maybe he wasn't listening to some younger ears and sort of seeing where the puck is headed. I mean, social media, the internet, everything has changed how we get our information and newspapers just don't hold the same status as they once did, I guess.

Frankel: Yeah, it's sad. Because one of my proudest moments, working for The Motley Fool, was the first time I saw my name in print in USA Today. So I like newspapers -- I mean, I grew up on newspapers, but at some point, you've got to realize the world is changing, and it looks like Buffett is doing that.

Moser: That's right. That's right. Well, before we continue, I want to remind listeners that if you're looking for more stock ideas and recommendations, make sure to check out our Stock Advisor service here at The Motley Fool. You'll get stock recommendations from David and Tom Gardner every month, you get Best Buys Now and a whole lot more. So just go to, and we've got a special 50% discount for our listeners. Check it out, again, at

All right, Matt, we've got another installment of "The Last Stock You Bought and Why?" I've got a few of these to read off here real quickly today. We have one from @bretdividends. He says, "You want to guess what is Yext on my buy list" -- and I see what he did there; he's just bought Yext. So, there you go Bret, good call.

From @lalaixix, just say that is Gabriel. Gabriel says, "The last stock I bought was MercadoLibre. I wanted to add to my war-on-cash basket but couldn't decide whether to start a position in PAX, Euro, or StoneCo, so I went with the one already owned." Very hard to knock you for buying MercadoLibre, Gabriel. Good job!

And finally, from Anthony, @kingoffifthstreet. He says, "The last stock I bought was Crocs. Love them or hate them, about five pairs for Christmas this year -- it's a huge deal and growing with the teens and preteens this past holiday season. Collaboration selling out minutes, it's undervalued in my opinion." Anthony, I've never even owned a pair of Crocs -- no, wait, I take that back, my wife bought me a pair of Crocs one year, many years ago. And you know what, I never ended up wearing them, I just didn't find the use for them. I think I like those Under Armour flops, those slides a little bit more, they are a little bit more comfy. Matt, you ever own any Crocs?

Frankel: Yeah, I totally disagree with you. When I lived in the Florida Keys, I wore my Crocs all the time. They're great to wear in the water. Their beaches are really rocky down there. I found a lot of use in mine.

Moser: Yeah. Maybe I've got to give them another shot. Maybe I'll do that, Anthony, good call.

All right, well, Matt, let's wrap up this week with our ones to watch. What stock are you going to be keeping your eye on this week?

Frankel: Well, as you know, I kind of changed mine at the last minute because I got some cool news. Goldman Sachs. I've talked about the bank a lot and their consumer banking potential. And I just got word that they are about to start offering small business loans on Amazon to Amazon merchants. Right now, Amazon has its own in-house business loan platform. But Goldman is going to use Amazon's existing infrastructure to start offering small business loans.

And this is kind of just another step toward becoming the next big consumer bank. I mean, they've got into personal lending business through the markets platform, the savings business, they offer the Apple credit card, they're the bank behind that. They're expected to release some sort of Main Street investment platform. And now, if they're doing small business lending, that's just another form of consumer bank and they're getting their hands in. And I think the market is really underestimating the potential of how big Goldman's consumer banking business can get.

Moser: Yeah. That's interesting news right there. I wonder -- that seems like they're going after Live Oak Bank's market right there. I mean, that's specifically the market that Live Oak targets. Do you feel like that's something they ought to be worried about there?

Frankel: Well, possibly. They're going after a lot of companies with this. But, yeah, Live Oak is definitely going to be a direct competitor. I mean, I think most credit card companies and traditional banks should be worried. I think Goldman does not have a big branch infrastructure they have to pay for, so they have a nice inherent cost advantage over the existing banks. And they have a great brand name. I mean, I can't think of a name that's more synonymous with finance in America than Goldman Sachs. I just think they could be, someday, one of the big U.S. banks in the consumer business.

Moser: Well, certainly something worth keeping an eye on. I'm going to be keeping an eye on Chipotle. I know it's not your traditional finance company, Matt, but I'll get to it. Hang on one second here. All right. Chipotle earnings come out on Tuesday. I'm going to be interested to see how much traffic of theirs is going through mobile these days. Their digital business last year represented 11% of total sales. And in the quarter a year ago, it represented $160 million and 66% growth. And so, we only just saw the beginning of their mobile strategy, really, a year ago. And it seems like it's been a big point of focus.

And as someone who eats at Chipotle now and again, it feels like they've improved their digital presence in a number of ways. And, hey, I mean, they even got a mention on PayPal's call this quarter, when management said, "Last year we saw brands, like, Netflix, Pepsi and Chipotle use Venmo payouts to reward their customers and pay, them via Venmo." So, you know, it's neat to see that you've got these businesses that are figuring out ways to integrate these payment solutions into their business models and generate some traffic out of it. Some of them I'd be very interested to see where we stand on that digital traffic or in those mobile payments this coming quarter and that will drop tomorrow, Tuesday, after the market closes. You own Chipotle stock, Matt?

Frankel: I don't. I considered buying it when it was about half as expensive as it is now and I kind of regret not doing it. But I am a customer. I love their products.

Moser: I was going to say, what's your go-to when you go there?

Frankel: I get a bowl, I get a barbacoa bowl.

Moser: Barbacoa, that's good stuff. Yeah, I like the bowl, because I think you know what, you can keep that wrap out of the way and you cut the sodium intake at least a little bit. And then you just get yourself some chips. And you don't even need to get a fork for the bowl, you just use the chips as your silverware and you can just eat the silverware. And then you're not even going to be wasting the plastic on a fork.

Frankel: Exactly. [laughs]

Moser: Alright. Well, hey, Matt, listen, enjoy your time down there in sunny Beaufort. Safe travels back up to Columbia when you head back up there, OK? It's great talking to you this week. Thanks for joining us!

Frankel: Always. Always fun to be here.

Moser: OK. 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.

Thanks to Dan Boyd behind the glass for making us sound good this week. We're Matt Frankel, I'm Jason Moser. Thank you for listening, and we'll see you next week.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$461,000.00 (-2.26%) $-10,670.00
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
$306.73 (-1.99%) $-6.24
Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
$1,252.89 (-5.23%) $-69.17
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$77.18 (-3.22%) $-2.57

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