PayPal Earnings, Apple's Latest Acquisition, and More

In this week's installment of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, take a look at PayPal's (PYPL 0.34%) excellent second quarter, as well as the latest results from SVB Financial (SIVB.Q -1.96%). Plus, Apple (AAPL -1.22%) recently announced the acquisition of a start-up whose tech will turn iPhones into payment terminals (sound familiar?). Finally, as earnings season continues in full swing, hear what the pair will be watching as Square (SQ -2.28%) and Bill.com (BILL -2.26%) report later this week.

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This video was recorded on Aug. 3, 2020.

Jason Moser: It's Monday, Aug. 3. I'm your host Jason Moser. On this week's Financials show, we're going to dig into some recent earnings reports. We've got PayPal earnings that just came out. We've got Silicon Valley Bank earnings coming out a couple of weeks ago. We're also going to take a look at a little acquisition that Apple has just made, one that probably flew under the radar of most, because it's such a small deal, but it is a small deal that could have a big impact in the payment space.

Joining me, as always, this week, it's Certified Financial Planner, Mr. Matt Frankel. Matt, how's everything going?

Matt Frankel: Oh, pretty good. We're starting to get a little bit of the tropical storm right here, as you can see behind me, but... [laughs]

Moser: Oh, yeah. [laughs] We have -- yeah, the clouds are starting to roll in up here too. So, I suspect it's just a matter of time, but thankfully we're not directly in the path of anything. I told you before, I was down there in South Carolina back in '89 when Hurricane Hugo hit and that was just -- I mean, you want to talk about life lessons, man, I learned a lot about the power of Mother Nature in that stretch of time. It was eye-opening, to say the least.

Frankel: Yeah. So, we're in the path of it, but it shouldn't be that bad. I mean, in the Florida Keys, we barely close schools for tropical storms. So, I came to South Carolina prepared. [laughs]

Moser: Oh, man, that reminds me, and we'll get going here, [laughs] but that reminds me of one time, a number of years ago, up here in northern Virginia. I guess they were forecasting some fairly heavy conditions. I mean, it wasn't a tropical storm, but it was supposed to be, I guess, potentially dangerous, but they canceled school due to wind. And in hindsight, the wind was just like, you know, maybe a tough day on the golf course. But it just kind of struck me: Wow! They actually closed school for wind. I just did not see that until then.

But enough about the weather, Matt, let's talk about some of the companies that we've been following here this earnings season. And we'll just go ahead and open this up with PayPal, because that's a company that so many listeners are familiar with, one that you and I talk a lot about, obviously, for a number of reasons.

Last quarter, I said that to me it felt like PayPal won earnings season -- not that there's ever really a contest or whatever, but it was a testament to how strong of a quarter they had and the report that they delivered, it was impressive on a number of fronts. Now, I don't know that they necessarily won earnings season this quarter, but man, they certainly came close, because they chalked up another really nice quarter.

Frankel: But we'll see. Earnings season isn't done yet. But the company did say they had the strongest quarter in their history, which, from PayPal, that's a pretty bold statement. Revenue growth was 25% year-over-year. Not only did they reinstate their outlook -- remember at the beginning of the COVID pandemic, all these companies got rid of their guidance because of the uncertainty or whatever -- not only did PayPal reinstate its guidance, it raised its outlook for the year.

Moser: [laughs] That takes some serious stones, doesn't it?

Frankel: Which is pretty crazy in this environment. I mean, 25% revenue growth in the second quarter, I mean, I bet I can count on one hand the number of major companies that could say that. They added 21.3 million customers during the second quarter alone. I mean, PayPal was really up. I hate to say "beneficiaries" in this environment, but they really were a beneficiary of the stay-at-home economy. So, out of those 21.3 million customers, I'm willing to bet that a lot of them are just doing the PayPal thing for temporary purposes while the pandemic is going on. But a lot of them will be new PayPal customers for life.

A lot of that was Venmo. Venmo's payment volume was up over 50% in the quarter, which is pretty crazy. You know, if you have to send your friend money right now, with social distancing, you can't just go hand them cash. So, people are using Venmo a lot more. They're developing their technology, they are doing a great job of integrating the Honey acquisition. We talked about that a lot recently. The honey user growth was 3 times its first quarter level.

So, I mean, I was trying to find a bad number to add to that list I just rambled off, but I really couldn't do it, could you? [laughs]

Moser: [laughs] No. And I mean, it's an interesting point that you made there about Honey. When that deal was first announced -- and it was not a drop in the bucket, they paid a good chunk of change for that -- it was kind of like, well, I mean, I could see it going either way. But in today's environment, and you have to figure that over the course of the coming year, maybe even further, folks are going to be somewhat strapped. I mean, they're going to be looking for bargains wherever they can find them. And that's exactly what Honey does. I could see users using that more. And it's becoming apparent now that it certainly seems like a more complementary addition to the business than maybe we would have thought initially.

The thing that got me, I mean, there are so many -- you're right, so many of the numbers from this report were just stellar, and it's really hard to pick one that was better than anything else. You know, I always focus on Xoom, the business they acquired, the international remittance company Xoom. And to see that net new actives for their Xoom platform were up 600% from the previous quarter. Again, just to your point, when you have to get money to people, and particularly now, if you're looking to get money to people overseas -- that's what Xoom is really. Their specialty is outbound remittances. It clearly is becoming more and more an option that people are trusting. And then to your point about Venmo. Yeah, I mean, total payment volume up 52%, $37 billion, $222 billion flowing through the entire PayPal network, Matt.

Frankel: Yeah. And just to kind of put that in perspective on how big a company PayPal is. I mean, Square had $25 billion in the first quarter. And that includes Venmo, that includes PayPal, you know, that includes all the channels, but even so, that's a remarkable amount of money. And I mean, the way we pay has really transformed over the past few months alone. And that's really being reflected in PayPal's numbers. Now, if we want to tip somebody or send somebody a small amount of money, we do it through PayPal or Venmo. You don't drop cash in a tip jar. People like Dan Kline -- we were just talking about the online concerts he was hosting for his musician friends, and they were all being tipped through Venmo and PayPal and Cash App and things like that. We're finding new uses for these services, is the point. And now we're starting to see how that's reflected in the numbers, and it's pretty impressive.

Moser: It is. And I've seen a couple of times over the past few weeks, I mean, [laughs] the coin shortage, of all things, right? Have you seen this around, different places? I mean, there's a coin shortage. And that just goes to -- you know, people aren't out spending as much, they're not out spending cash as much. And so, coins now are less widespread in the system than perhaps they were before. And you even saw -- I mean, I couldn't believe this one, I saw Chick-fil-A offering food incentives for people to either spend without coins or to use coins at their store. But one way or the other, it was to accommodate this coin shortage, and they were offering food incentives. And it just struck me, I was like, wow! I mean, this really is something. I don't know that this -- I don't know that we go back to the way we've been used to spending money before. I think this really is one of those times that's going to be the catalyst that, sort of, takes it over the edge for a lot of people.

Frankel: It is. I remember the last time I had to cash in a jar of coins, they charged me something like an 8% fee. Now, a lot of businesses are adding, like, a 5% bonus if you cash in a jar of coins. So it's crazy how times have changed.

Moser: It is. And you know. I'll just say this. I mean, clearly, we talk about the War on Cash all the time, and the companies that are benefiting from this. I don't think that you or I believe that this is going to be turning and going in any other direction. I think that writing is more or less on the wall. But I do think it's interesting to see from PayPal's perspective, you see a lot of companies that are playing offense right now in a time of weakness and a time of turmoil. And a lot of companies out there are seeing this as an opportunity. And PayPal is certainly no exception there. You know, Dan Schulman, the CEO of the company, said on the call -- and I just thought this was pretty cool -- he said, "This is our time and we intend to seize the moment." And so, that gives you just, I think, an idea of the mindset of how they view this point in time. This is a big moment for this company, I think, and they are going to invest heavily in what they see is really an electronic currency future.

Frankel: And, I mean, after seeing these numbers, you really can't argue with that statement. [laughs] I mean, what else is there to say? It was a fantastic quarter. The earnings season is still going on, so I don't want to declare them the winner. I mean, Square reports Wednesday afternoon, I think. So, I don't want to declare them the winner, but they've got a pretty good head start. [laughs]

Moser: Yeah, they did, all right. Well, I said on Motley Fool Money this past week, I think that Teladoc gave them a run this quarter. Teladoc, obviously, not a financials [company], but yeah, that was another really strong quarter. And again, companies taking advantage of less physical contact, utilizing, you know, connectivity to be able to get more things done. So, yeah, really cool to see.

Let's move away from the War on Cash for a minute, and talk about more traditional banking. You know, we talk often about the big bank, the big four, with Wells Fargo and Citi and JPMorgan and Bank of America, but there are other little banks out there that are figuring out ways to manage in this environment, OK. Silicon Valley Bank, SVB Group, also released earnings a couple of weeks ago. It's clearly a difficult time for banks with the interest rate environment. Silicon Valley Bank, they're a little bit of a unique situation there. And you can guess from the name, the things that they actually are working on. I mean, this is a bank that's focused very much on tech, life sciences, healthcare, venture capital. I mean, shoot! I think they even have a big place in the wine industry, if I'm not mistaken. But you had a chance to look through that earnings release recently. I was wondering, if you saw anything in there that stood out to you?

Frankel: A little bit. I mean, a lot of it is what you would expect from a bank in the current environment. I mean, earnings per share was down from $6.97 the same quarter a year ago to $4.42 a share. So, they lost about a third of their earnings, about what you would expect for a bank in this environment. I wouldn't call that a giant surprise. But a few things did stand out to me. The client funds under management were up 13% from the first quarter, net interest income dropped a little bit, not too surprising, their loan portfolio grew by 8% year-over-year, which is pretty impressive. The net charge-off ratio actually declined from the first quarter, which, you know, banks are setting aside billions of dollars in anticipation of loan losses, things like that. It's really early to tell how the pandemic is going to affect the banking industry in terms of loan losses. The government support has just been pouring in, especially during the second quarter, government support was just pouring into the market in terms of small business lending, in terms of the enhanced unemployment benefit, stimulus checks, you know, the whole nine yards. And as of now, that's all expired, especially the unemployment benefits, things like that. So, we haven't seen the full effect. So, take that number with a grain of salt.

But the charge-off ratio increased in most of the big banks. It was a pretty small and manageable increase, but it increased nonetheless. Silicon Valley Bank, their net charge-off ratio actually declined. So, that's something that really stood out to me. And, I mean, it was a pretty solid quarter. I mean, I wouldn't call it a stellar quarter, but they certainly performed a lot better than some of the other big banks.

Moser: Yeah, and you know it strikes me with SVB Financial, that you know this is one of those banks that perhaps could give you the opportunity to invest in a little bit more cutting-edge technology, forward-looking technology without necessarily being exposed to the risky nature of that space, you know what I mean? I mean, this is a bank that essentially is helping underwrite and grow in totality, I mean, it's a pretty risky area, but when you get it with the banks, it's like a well-diversified portfolio, right? I mean, you're not really exposed to one particular business, you get a lot of different exposure with a bank like this. Which, to me, in a world of just, sort of, traditional sleepy banks, this stands out to me as maybe a little bit more exciting in that regard.

Frankel: Yeah, I mean, it's like a cross between a tech stock and a bank, I would almost call it. You know, if you believe in the whole, you know, the tech revolution that's going on now, which I mean, I don't know about you, but my portfolio's biggest winners recently have been the tech companies. They haven't been all the value stocks I like to talk about, it's been all my tech companies that are winning. And that's the kind of companies that Silicon Valley Bank lends to and invests in, for that matter. So, if you believe in that whole market and if you believe that the rally that you're seeing in the Nasdaq has legs, then Silicon Valley could be the banking play for you.

Moser: Could be, could be. You mentioned Square earlier, and I thought that would be an interesting segue into this final story of the day, and one that we saw here: Apple, which just, you know, another company to report really a strong quarter, an impressive quarter. Apple has acquired a little company called Mobeewave. Just a little start-up technology company that ultimately is focused on payments technology. It can basically transform your iPhone into a payment terminal, is how they put it. And it looks like the acquisition is about $100 million. Mobeewave is just a little start-up. But when you read what Mobeewave does, it sounds very familiar to some of the stuff that Square does, it's not all of it.

I mean, $100 million for an acquisition like that, let's recognize the fact that Square is a considerably larger business. But you know, with Square, when you look at the hardware, you look at the software, you kind of take that experience into consideration, Square seems like a very Apple-esque type of company, sort of Apple-inspired. And I don't think that's any accident. But to see Apple make this little acquisition, it kind of makes you wonder maybe if Square should be looking in the [laughs] rear-view mirror a little bit.

Frankel: Well, I think Square's first-mover advantage in the space still has legs. I know Apple has unlimited financial resources. Apple could afford to buy Square four times over right now. But having said that, Square figured out how to turn an iPhone into a payment terminal 10 years ago. So, I mean, we talked to Jim McKelvey not long ago, if you remember that. And he was telling how he solved that problem a long time ago. Now, clearly, you know, the technology has evolved and there's different applications, things like that. I don't really see this is a competitive threat to Square at this point, just because Square has done what Apple has done, in the sense that it's really built out its own ecosystem really well. Square is not just a payment processor. They also loan money to their merchants through the online store, they facilitate things like curbside and on-demand delivery. Apple doesn't do any of those things. Apple is not planning on pursuing a banking license to provide other types of financial services to merchants. So, I see Apple really, if anything, being able to penetrate kind of the lower end of the market, meaning like the guys at the farmer's market who used to use the little Square readers. I could see Apple getting a piece of that market, people who don't want to pay for additional hardware, because Apple could absolutely take a loss on hardware and things like that and undercut Square, or take a loss on payment processing fees and appeal more to smaller merchants.

But I see Square's ecosystem as really being kind of the big advantage here. I mean, think of why people are willing to pay so much for iPhones, or willing to pay so much for MacBooks and things like that. It's because of Apple's ecosystem. I mean, that's Apple's big competitive advantage. It's not that its individual products are so much better than the competition, it's the ecosystem. And, I mean, at least that's how I've always understood Apple. And Square is becoming an ecosystem, and it's had a 10-year head start over this company Apple just acquired. So, I see Apple kind of integrating this into -- and to be fair, Apple is not saying why they bought the company. They've specifically said we're not discussing why we bought it.

So, I could see Apple really kind of using this for more niche purposes, you know, smaller merchants, letting their users just do one-off payment transactions really easily. But I don't really see them as being a competitive threat to Square, especially in the the larger business side of their [operation]. You know, with the Square terminal and their hardware is really built out, they've become a whole lot more than just using your iPhone as a payment terminal.

Moser: Yeah, that's a good point. And I tend to agree with that. I mean, I think that what Square has done, it's easy to think of Square as just as a hardware company, but I mean, the fact of the matter is, it's the hardware that gets you in there, but it's the software that keeps you there, I think, for most. And I could certainly see -- you know, to me, I can see this acquisition almost looks like, it's something they're just wanting to add, this would be another feature to the iPhone. You know, it would be another user-friendly feature to the iPhone for people that love their iPhone, and one more reason why you'd stay in that iPhone universe, right? I mean, I don't know that this is anything that is going to be terribly meaningful to a company the size of Square. And, yeah, to your point, the first-mover advantage there is significant, really. To overcome something like that, you'd have to present a tremendous value proposition. So, yeah, I tend to agree.

Okay. Well, Matt, before we wrap it up this week, let's give our listeners one to watch, because earnings season is still in full tilt. I think we got like 1,000-plus companies reporting this week alone. What company are you watching this week and why?

Frankel: Oh, a little drumroll here. Surprise, surprise, I am watching Square. [laughs]

Moser: No. [laughs]

Frankel: [laughs] Well, specifically, I'll tell you what I'm watching when Square reports, not just the headline numbers that we always listen to. The online store part of Square has exploded during the first quarter. It went from being almost nothing at the beginning of the quarter to being over $50 million a week in payment volume, which was a 5X multiple just in the first quarter alone. I want to see how that grew in the second quarter, especially since they rolled out the on-demand delivery platform in June. So, they're letting retailers partner with third-party companies, say, like Uber to facilitate on-demand delivery of their products. So, I want to see how that's working out.

And the investment platform which is very, very new, you know, intended as a Robinhood competitor. I want to see some numbers behind that and see how that's kind of building out now that everybody is getting into the investment game with their stimulus check money and casinos being shut down and you know all the stuff you read about the Robinhood investors. I want to see if the Square investors are getting into the game too.

Moser: Yeah, that's a good one. I'll be interested just to learn more about that. I'm going to keep an eye, they don't report this week, but they are reporting this month. It's Bill.com, ticker BILL. I did a deep dive on the company here a little while back on one of our shows. But this is cloud-based software that essentially looks to automate back-office financial operations for those small- to medium-sized businesses, those SMBs. Ultimately, just helping them take the paper check out of the equation. And I just, you know, given everything that we talk about in the payment space, that's a pretty fascinating one.

And the company clearly is doing something right. Last we reported, the company had over 91,000 customers, processed 6 million payments, which represented year-over-year growth of 28% and 23%, respectively. And I think that there's a lot of potential with a company like this and the network effects that it can develop. So, trying to fully understand what their competitive advantage is and what the differentiator is. But it's had a great year, the market seems to really like this one. So, I'm looking forward to learning more about it.

So, Matt, I think that's going to do it for us this week, buddy. Any parting words for our listeners, anything that you feel like people need to know just in case that hurricane knocks you out for a little while?

Frankel: Oh, I don't know, I'm watching the earning season this week, like you said, over 1,000 companies, so just, you know, sitting back in a chair and watching the show is my parting words.

Moser: [laughs] I love it. All right, man, well, I appreciate you joining us this week. As always, look forward to doing it again next week.

Frankel: All right, I will be here.

Moser: All right. Well, that's going to do it for us this week, folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus or you can drop us an email at [email protected].

As always, people on the program may have interests 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.

A big thanks, as always, to Tim Sparks for making this happen for us. For Matt Frankel, I'm Jason Moser, thanks for listening, and we'll see you next week.