Why Coronavirus Vaccine News Is Great for Bank Stocks and REITs

The positive COVID-19 vaccine news just released by Pfizer (NYSE:PFE) sent the stock market soaring, but to the surprise of many investors, real estate investment trusts, or REITs, and bank stocks are some of the best performers. In this episode of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why mall REITs like Simon Property Group (NYSE:SPG) are soaring by more than 20% on the news and some of the biggest U.S. banks, including JPMorgan Chase, Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC) are up by double digits as well. And let’s not forget that we’re still in earnings season — we’ll also discuss what investors should know about the latest results from Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B), Square (NYSE:SQ), PayPal (NASDAQ:PYPL), and more.

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.

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This video was recorded on Nov. 9, 2020.

Jason Moser: It’s Monday, November 9th. I’m your host Jason Moser. On this week’s Financial show, we’re going to dig into the news of some very encouraging vaccine results and how that could potentially impact our world of financials related stocks. We’ve got a few earnings reports to dig into, we’ve also got our ones to watch for the coming week. Joining me this week, as most weeks, glad to have him as always, Certified Financial Planner, Mr. Matt Frankel. Matt, how’s everything going?

Matt Frankel: Well, pretty much every stock that I’ve ever mentioned on the show is up by more than 10% today, so I’m having a pretty good morning, I don’t know about you.

Moser: [laughs] Yeah. Hey, listen, you know, I don’t let the stock market dictate my attitude, but it’s certainly nice when you see them go up, I mean, you don’t see —

Frankel: I don’t either, but today might be an exception. [laughs]

Moser: We’re seeing certainly some of them are going down, and we’ll get into that, the whole stay-at-home stock phenomenon and how that’s playing out. That will be just one part of our broader discussion here, but you know, let’s go ahead and jump into this discussion, because clearly the big news of the day, the drugmakers Pfizer and BioNTech have indicated that their COVID-19 vaccine is more than 90% effective.

Now, we don’t want to get ahead of ourselves here. This could mean a lot of different things, but it really does seem, at the very core, it marks a major step in the right direction in this battle against COVID-19. And clearly, Wall Street is loving the news. Stocks across the board are feeling pretty good today, with the exception of the stay-at-home stocks; of course, we’ll get to those.

But, Matt, one area of the market where we’re seeing a big reaction, and it’s something we talk a lot about here on the show, it’s in Real Estate Investment Trusts, those REITs that we talk about a lot. Talk to us a little bit about why you think that the REIT segment of the market is receiving this news so positively?

Frankel: You got to remember there are many different subsectors of REITs that have kind of different, you know, dynamics here. So, there are some stay-at-home REITs, like, think of the data center REITs and things like that, and they’re, kind of, not doing that great today. But most REITs own commercial properties that depend on people being able and willing to go places. So, when you look at just some of these numbers, and these were at 12:30, so they might have changed [laughs] by the time you are hearing this. Just some of the favorite ones we talk about on here, Empire State, the company that owns the Empire State Building, is up 30% today. Tanger Outlets that we talk about, they’re up 23% today. Simon Property Group, the biggest mall REIT is up 26%. EPR Properties, about half of its portfolio is movie theaters, is up 41% today alone.

Moser: Yeah, that was the one I wanted to talk with you a little bit more about, I’ll let you finish, but EPR that was one that struck me as standing out.

Frankel: Yeah. Welltower, which is healthcare REIT that owns a lot of senior housing — which for obvious reasons, that hasn’t been doing well — is up 17% today. And last one, a lot of people are worried that people are going to leave cities if this pandemic keeps going, and AvalonBay, the big apartment REIT that owns a lot of urban apartment buildings, is up 12% today. So, across the board with all the, kind of, reopening REITs are doing phenomenally well today.

Moser: Yeah. And you’re talking about people leaving the cities, you’re talking about, sort of, that bigger picture idea that with going more toward a remote workforce or at least companies adopting the mindset that their employees can work offsite, perhaps permanently in many cases, I mean, that’s going to maybe reduce the demand for living in these big cities. You talk about moving out toward the suburbs, and it sounds like apartment complex REITs, like the one you mentioned, that’s got to be the reason for the optimism, I assume.

Frankel: Well, for sure. And also, take it with a grain of salt, because these are some of the most beaten down stocks during the pandemic. When I mentioned EPR, they’re still roughly less than half of what they were trading for before the pandemic, even after today. So, a lot of these are really beaten down. And AvalonBay, the apartment one, I’m not saying there’s going to be no remote work trend that prompts people to leave cities, but the stock is down 40% year-to-date, and the vacancy rate increased by 3%. So, that kind of just seems like it’s not balanced correctly.

Moser: Yeah, it doesn’t, you’re right. And it’s always worth remembering too, when we see headlines like this, because this is a headline we woke up to this morning, all across the country you could tell, I mean, there was plenty of excitement out there, because this is the news that you want to hear, right? This is not the magic bullet, so to speak, but this is definitely the news that you want to hear. It always strikes me too — and I’m not trying to take the glass half empty perspective here, but when you see this type of reaction, it’s always worth remembering, this isn’t over, right? I mean, this marks a big step forward, but we’re not through this yet. So, we still have a full Winter here, really, to go through.

And it feels like, let’s try to temper everybody’s expectations, you know, get questions throughout the morning on should I be buying these stocks or selling these stocks. And it’s like, you know what, oftentimes, for investors, it’s better to maybe take news like this, digest it through the course of the day, give yourself some time to think about things, the implications here, because it really, kind of, feels like this is great news. But there’s most certainly going to be another bad headline at some point here in the next week, two weeks, one month, whatever it may be. So, it’s always worth remembering, listen, this doesn’t just mean everything is back to normal and everything is hunky-dory. I mean, this is good news, but we’re not through this yet.

Frankel: Yeah, I mean, don’t throw off your mask and run out into the streets to play just yet. But having said that, this was definitely good news, but this is going to take some time to really roll out. At a minimum, Pfizer said they will be ready to submit for emergency approval by the end of this month if everything goes well, that’s two weeks after they have all their participants have gone through the trial for two months rather. After that, they’re only going to make 50 million doses or so this year. So, even assuming they get all 50 million of those into people’s arms by the end of this year, that’s still roughly 80% of the U.S. population that is not going to be vaccinated. And then you have another few months, figure sometime in mid-2021, anyone who really needs a COVID vaccine will have one, so. And that’s if things go well from here on. But this is definitely a step in the right direction, and these companies desperately needed some light at the end of the tunnel.

And another thing to mention is that a lot of this could be short covering that we’re seeing today. You’re seeing this spike. I mean, I looked right before we were on and some of the names I mentioned don’t have a ton of short interest, but if you look at some of these numbers, they are just, kind of, off the charts. Tanger Outlets, for example, 51% of its shares are sold short right now. Seritage Growth Properties, 50% of its shares are sold short. EPR, it’s over 10%. Almost 9% of Empire State Realty is sold short. So, you could see some of these, you know, people might be covering their shorts on this news too, which could be really fueling today’s price action.

Moser: Yeah, and that’s certainly not to take away from the gains that the stocks are seeing, but it’s worth remembering, yeah, you said it, they’ve fallen a long way, short covering is what it is, but remember, that’s not fundamentally really tied to the business. I mean, that’s a short-term thing in nature anyway. And we’re still really waiting for some form of stimulus package to come, hopefully sooner rather than later, because clearly, folks still need it, and it sounds like it’s really just going to boil down to the President and the Senate negotiating some sort of a package there. I don’t think it’s really a matter of whether stimulus comes or not, it’s really just a matter of how big the stimulus package really is.

So, let’s pivot over and talk about that a little bit in regard to banks, because you see banks are another sector today that are really feeling the love. I’m looking at Bank of America here, for example. Right now, as we’re recording the show, Bank of America shares are up 14%. I was looking at Ameris Bancorp (NASDAQ:ABCB) earlier, Ameris Bancorp up +20% today. So, you’re seeing that covering everywhere from big banks to small banks and everywhere in between. This is interest rate related news, of course, but banks are going to benefit from positive economic news, I mean, they’re going to benefit from a healthy economy, and if this is one step closer to a healthier economy then you can certainly understand the optimism in banks today as well.

Frankel: Right. Well, there’s kind of two reasons you’re seeing banks benefit from this. No. 1 is interest rates. This isn’t interest rate specific news, but the 10-year Treasury soared to its highest level since March today. And so, that’s kind of a forward-looking indicator that the economy is going to be healthier than people thought. You know, higher interest rates means higher profits for banks, but that’s really not the main driving force. The main driving force is that there’s a fear that there’s going to be kind of a long-tailed uptick in loan losses, people can’t afford to pay their bills, things like that, that’s going to go on until this pandemic is over. And it’s a well-founded fear, if you look at the numbers during the financial crisis when unemployment was elevated for a couple of years after the financial crisis, loan losses at some of these lenders stayed pretty high. So, there is that fear. And the sooner we can get back to business as usual, the sooner that fear goes away, and we’re starting to see some of that today.

And if you look at some of the riskier consumer-facing lenders, you’re seeing the gains are even higher, you mentioned Ameris, which is pretty much a consumer-facing bank. American Express is up 21% today, making our friend Warren Buffett a lot of money in the process.

Moser: [laughs] I mean, it’s easy to forget, American Express is a bank. Yes, it’s that credit card in your wallet, but it is technically a bank, and so it’s beholden to all of those capital requirements and those rules and whatnot that your Bank of America and JPMorgans have to adhere to as well.

Frankel: They are the lender for — if you use your AmEx Card, American Express is the company lending you money. So, if you run into trouble, you lose your job, something like that, and can’t afford to pay it back, American Express is the one who gets left with an uncollectible debt. As the fears of that, kind of, start to go away, you’re going to see those companies benefit. The more consumer-facing banks like Ameris, like, American Express. Wells Fargo, out of the big four, I think, was the biggest mover today, because it’s a consumer-facing bank, not just an investment bank. And if you look at some of the investment banks, like Goldman Sachs, it’s up by 7% today, which — [laughs] the fact that it’s up by 7% is, like, the worst gain in the sector, is pretty impressive. But that’s because the investment banking businesses generally held up better during the pandemic, and you’re seeing all these consumer-facing banks really pop because the experts are less fearful that you’re going to see this long-tailed loan default wave come through.

Moser: And then you look even deeper into some of those numbers, and we’ve seen this over the past couple of quarters at least with a lot of these banks, the themes during a lot of these calls have really revolved around those loan loss reserves. These banks are reserving a lot of money, they’re putting a lot of money aside for the potential for the possible losses that they could incur. If those losses don’t materialize, or they don’t materialize to the levels that those banks thought that they would. Well, that’s a lot of money they put aside that is then going to be able to go, really, right back down the bottom-line for these banks at the end of the day.

Frankel: Yeah, they call that a reserve release, and you saw that a little bit in a few of the banks in the third quarter. You know, they were setting aside billions and billions of dollars in the first half of the year. And it turns out that the pandemic didn’t turn out to a worst-case scenario economically, part of that was due to the CARES Act, part of that was due to just, I mean, it didn’t continue to spiral out of control in March, it kind of leveled off after the shut downs and things like that. So, the economic impacts weren’t a worst-case scenario.

2020 hasn’t been a great economic year by any definition of the word, but we’ve definitely avoided a worst-case scenario. So, banks were able to release a little bit of their reserves, some banks, during the third quarter. If there is a widely available vaccine and the pandemic ends and, you know, unemployment already is under 7% in this country, if it falls back to pre-pandemic levels, which were in the 3% and 4% range, then you’ll see a lot of these reserves come back and be released, and that turns into a big earnings boost for these banks. We saw that in the years following the financial crisis when they were finally allowed to release some reserves.

Moser: For sure. We’re going to pivot into a little bit of a discussion here on the “stay-at-home” stocks, it’s been a pretty unique phenomenon to 2020, I think, and an interesting one to discuss. And I guess to kick that discussion off, for me, really, it’s interesting to see this disparity between four particular stocks. And if you look at MasterCard and Visa, for example. The market is rewarding those companies today, their stocks are doing very well. On the flip side of it, you look at Square and PayPal, those are companies where the stocks are actually selling off, and I think it’s just interesting to note that, because we talk about this a lot, where MasterCard and Visa really — I mean, at the end of the day, these aren’t banks, they’re not lenders, these are networks, these are toll booth models, they’re really good proxies for the economy for consumer spending.

And if this is news that tells us that maybe the consumer is going to be able to come back a little bit more quickly, that things are going to start looking a little bit better, I can certainly understand why companies like MasterCard and Visa would be feeling some of the love today. But you flip it over, you look at PayPal and Square. PayPal and Square smaller companies, a little bit more diverse in what they do and what they offer. I wonder, perhaps some of the pullback on these stocks today is valuation related, they both had [laughs] really good years, but it seems like there would be something more to it. I mean, there’s definitely the Square Capital side of the business. PayPal just chalked up a tremendous quarter, and again, it’s had a tremendous year thus far. I wonder if those pull backs aren’t just a little bit more valuation related than anything else.

Frankel: You got to think that Visa and MasterCard, they make the bulk of their money from a percentage of the transactions they process, they don’t care whether those transactions are in-person or online, there might be a little difference in the pricing and the fees they make, but, you know, rise in consumer spending in any form is good for those companies. So, the fact that consumer spending is forecast to rise now, presumably because of a vaccine, is good for Visa and MasterCard just in general, it doesn’t matter if people are doing e-commerce, if they’re going out to the malls, things like that.

On PayPal especially, on the PayPal side of the equation, PayPal depends — well, not just depends, but they benefit, specifically, from online spending. If you saw during the third quarter, PayPal added more subscribers, I think, than they ever have before, or their payment volume increased by more than it ever has before. And that’s because people are — for the most part — I mean, we’re venturing out a little bit to stores, but for the most part people are still staying home and shopping at home. And that’s why Amazon‘s (NASDAQ:AMZN) sales are still through the roof and things like that. So, PayPal benefits when people are spending money online.

Square, their core business is still in-person payment processing, but they are a fintech company, they’re building out their online capabilities, the Cash App definitely does better in a stay-at-home environment for the time being at least, with what it has to offer. You know, person-to-person money transfers aren’t happening in-person right now, so people are using things like the Cash App. And like you said, a lot of it could be valuation.

These have been some of the best-performing stocks, so I think today’s news could have triggered a rotation from those high flying tech stocks into these value stocks that we’ve been talking about, the REITs and the banks, that are all of a sudden seeming like a better value, because, you know, from a risk/reward perspective.

Moser: Well, that’s definitely understandable. I mean, I think we’ve all probably [laughs] been looking at the market this year, at least the second half of the year, and thinking, it’s nice to see it doing so well. But yeah, valuations become more and more a concern. I think that you’re right in that rotation point there, because we’re not seeing necessarily any real discrimination here in the selling of a lot of these stay-at-home stocks. Amazon and Netflix being down, obviously Wayfair, these businesses are not going to stop doing what they’re doing, right? These are businesses that are still very much going to be serving consumers in good times and in bad, so I think it’s worth noting for investors. It’s very easy to sit out there and talk about all the stay-at-home stock fad or whatever you might call it is over, but let’s try to look a little bit beyond that. I mean, the stay-at-home stock concept on its own, I think, was a bit misguided and that was very short-term focused.

Stay-at-home isn’t going to last forever, we knew that back at the beginning of the year. I would argue, if you’re an analyst and you’re surprised about what’s happening today, you probably need to work on being a little bit of a better analyst. We’ve been seeing this and talking about it for a long time here, so this isn’t a surprise. To me, the surprise would be, if folks were looking at a lot of these businesses and saying, oh, now their day in the sun is over. Amazon, Wayfair, Netflix, I mean, we don’t need to worry about Etsy, another great example. It’s not like people are going to stop shopping online, but there’s a psychology behind some of this today.

Frankel: Yeah, for sure. No one thought this was going to last forever. The reason today’s news is so significant is that it looks like it could be over sooner than we thought. And it’s not just that this came sooner than we thought, we thought we were going to see some stage three trial data in November, but it looks like no one predicted a 90% effectiveness rating from the first vaccine candidate.

Moser: That was really encouraging. [laughs] Really encouraging news.

Frankel: And I don’t know about you, but I’ve been reading, kind of, horror stories about the side effect potential of these vaccines. There was one article I read from some trial participants, I don’t think it was in Pfizer’s trial, where they said after the second shot, they were just on their bed for two days. So, it’s not only 90% effective, but it’s doing it without any significant side effects, which is, just on both sides, much better than anyone thought it would be.

So, no one thought it was lasting forever, but this is really giving them hope that the pandemic could actually become a thing of the past before too long, you know, we might not have to wear masks and I might be able to come see you in HQ before we thought it might happen.

Moser: Well, we will keep our fingers crossed. Like you said, there is plenty of work left to do, it does feel like this was really meaningful news today though; for a lot of reasons that you just noted right there. And so, you know, all we can do is, is continue to hope for the best. Of course, thank you to all of the brightest minds out there who are working so hard on our behalf to really help us, as not only as a country, but really as a world, as a global society to get past this, because it doesn’t discriminate, you know, the virus, you can’t stop it. Until you can actually come up with a vaccine, you can’t do anything other than try to mitigate it and manage it, and that’s what we’ve been doing at this point. But definitely good news. It seems like the market is receiving it very well.

By the same token, folks out there, don’t let this just make you think that everything is hunky-dory and get back to normal, this is one more step in the right direction, but it sounds like there’s still some work to do. We’ll continue to follow it and we’ll pay attention to the companies that matter to you most.

Speaking of the companies that matter to you most, Matt, let’s drop this discussion for a few minutes and let’s get into what happened last week, which was another slew of earnings. And we got to talk about all of these companies all week last week, we talked about some of them on Motley Fool Money last week as well. But there were a lot of companies in our space, the financial space, that reported earnings, and we want to get into them and talk a little bit about the quarters. We have a lot of them, so we’re going to get to them, we’ve going to give them their due attention in quick fashion here.

But let’s go ahead and start with, really, you know, this guy likes talking about elephant guns, let’s talk about the elephant in the room here, Berkshire Hathaway. And I’ll let you talk about this quarter, but I’ll just tell you, I was amazed at how much stock they bought back.

Frankel: Yeah. And you just hit the nail on the head, that’s the big headline, Berkshire bought back $9.3 billion worth of stock. I just wrote something about it on Fool.com today, because Berkshire actually takes it one step further than most companies and breaks down its purchases by month, by class of shares. So, whether it bought back the A. shares or the B shares, and the average price it paid per month.

So, remember that Berkshire can only buy back stock if Buffett and Charlie Munger both agree that it’s trading cheaply at any given time. And the average purchase price in September, when they bought back the most stock out of that three-month period, was in the $216 range, which is even after today’s move, is not that far from where it is now. So, that’s them telling the market that even at that price, the stock was much cheaper than its intrinsic value and was a really good just investment in general.

Berkshire’s operating businesses really didn’t give us any big surprises. The company still has about $140 billion of cash even after that buyback that we just mentioned. And I am really looking forward to its 13-F coming out this weekend, because remember, we don’t get to see what they did in their stock portfolio yet, they’re going to release their 13-F filing, it’s called, which they have to release 45 days after the quarter ends, which adds up to the 14 of the month. So, we’ll see that soon.

We do know that Berkshire’s cost basis in its stock portfolio went up by $9 billion during the quarter from this earnings report, and the only thing that we know they bought is about $2 billion of Bank of America stock. What’s with that other $7 billion, what they buy is what I’m, kind of, curious about? [laughs]

Moser: [laughs] Yeah. Well, I feel like we’ll be able to talk about that next week maybe. What do you think that disagreement between Buffett and Munger looks like? Whenever they’re deliberating the intrinsic value of that stock and whether it’s worth the repurchase, what do you think that disagrees … do you think they ever really, like, vehemently just disagree with one another?

Frankel: Well, this quarter, it doesn’t look like they disagreed much at all. [laughs] But in general, who would you say is the more conservative out of the two? I’d have to go with Munger.

Moser: Yeah, I think you’re probably right. Yeah, I think that’s right.

Frankel: So, they’re both very conservative investors, which is why when they’re buying back stock and sending the message that they think it’s cheap, that’s why I take it very, very seriously, because they’re both very conservative investors. But I mean, I’m sure they do have their own little closed door, you know — well, now they’re doing it probably through Zoom, but they probably have an argument about what the company is really worth and all that. Obviously, they didn’t argue too much this quarter, they bought back a whole lot of stock. That’s almost 2% of the outstanding in one quarter, which is a pretty aggressive buyback.

Moser: That is aggressive. Well, you know, that tells you a lot right there, so that’s worth keeping in mind, and we’ll look forward to learning a little bit more about the equity moves here next week and beyond as well.

Matt, Square, not surprisingly, reported another very impressive quarter. It was one that I felt like, you know, after PayPal’s quarter earlier in the week, it seemed like, you know, Square was set up to report some good numbers, and they didn’t disappoint. There are a lot of numbers here that really make you feel like this business just continues to do a lot of good things. Total net revenue crossed the $3 billion mark, it was up 148% if you exclude Caviar, which they sold off a while back. What stood out to you in this most recent quarter for Square?

Frankel: Well, I’ve been following Square’s brokerage efforts for a while, because I love the Cash App. The Cash App users doubled year-over-year, which is really impressive at this stage considering how big it is. The gross profit generated by the Cash App — remember, we said a few times during the, kind of, earlier stages of monetization still, the gross profit generated by the Cash App nearly tripled year-over-year. Remember, they rolled out their stock trading feature on the Cash App, 2.5 million people had bought-and-sold stock on the Cash App as of the end of the third quarter. That’s pretty impressive. I don’t know the stats, but I’m sure when TD Ameritrade was invented, for example, they didn’t get to 2.5 million that quick.

Moser: It’s a lot. And they said billions of dollars have already been traded by the end of the third quarter. I saw that snippet and that was one that was something that really stood out to me as well.

Frankel: Yeah. And I mean, not only is their growth impressive, but it’s accelerating. Over the past six, seven quarters, they’ve grown consistently at 30% to 40% year-over-year revenue pace, or I’m sorry, gross profit rather. Gross profit was up 63% this quarter, so not only are they still keeping their growth trajectory alive, but it’s kind of like, it’s going kind of parabolic right now. [laughs]

So, Square is pretty impressive. I bought Square a while ago, I never really envisioned it would turn into what it has, I just thought it was a really interesting payment processing platform, to be honest with you. And my only problem with Square is that I didn’t buy more back in 2015 or whenever the IPO was.

Moser: [laughs] Yeah. Clearly, I have been a very happy shareholder as well; my daughters own shares, they feel pretty good about that. I can’t say that I found, really, anything in the quarter that concerned me. One thing to note, and this is not a mark against them, as a matter of fact, I think I really actually credit them for this, they’re going to ramp up investments in the business next year. Talking about 2021, they’re talking about ramping up investments in the business around 40% from this year. And that will impact profitability to the extent that revenue growth is impacted. So, we want to pay attention to that topline. The investments in the business could certainly play out on profitability. Again, that seems like a short-term thing in order to ensure the longer term success of the business, but you know, you keep those types of things in mind, because a company that’s going to spend like that, who knows what the psychology of the market is going to be in 2021, but maybe that opens up a window to add to that position if the chance arises.

Frankel: Yeah, for sure. I’ve considered pulling the trigger on some more Square for a long time, including in March when it was down in the $30s for a brief time, then I just got cold feet. I’m learning my lesson with Square over-and-over that, you know, keep adding to your winners. [laughs] One of these days I’ll actually take my own advice and do it. When I can stop talking about it for a few days, because that also has to happen.

Moser: Yeah, that’s one of our hurdles, but hopefully, listeners that are listening, taking your advice into consideration. Well, another one of our favorite payments companies here that reported last week, PayPal. You know, I mentioned that I wasn’t surprised with Square’s numbers, because PayPal had lobbed up such a great quarter earlier in the week.

And to your point there in regard to the user growth, the thing that stood out to me, and I went back a couple of calls to really confirm this, because when I saw what I saw on the release, I thought, wait a minute, what? Because that sounded like it was a much larger number than what they had initially guided for, and it was. If you go back to January of this year during the fourth quarter earnings call, management had set the target in that call for 2020 to add approximately 35 million net new active accounts. In this quarter three release, Matt, they upped that guidance. They now see adding 70 million net new active accounts for the year. So, essentially what’s been going on all year long has more or less doubled the user growth that they had projected back at the beginning of the year. And to no one’s surprise, they raised guidance pretty much across the board.

Frankel: Well, what’s really standing out to me is, I wasn’t surprised that they added a ton of users, say, in the second quarter when everything was shut down and people were only shopping online and that kind of thing. What really surprised me is they kept that momentum going into the third quarter, when for the most part, everything has reopened. So, they added over 15 million users in the third quarter alone, so I’m not surprised they raised their full-year guidance like that. And that they’re keeping that momentum alive and, kind of, really building out their base even [laughs] when the economy is reopening. So, that really stood out to me.

Just a stat to show you just how big PayPal has gotten. They processed $247 billion of payments this quarter, that is almost $1 trillion of volume flowing through PayPal’s system on an annual basis. That’s about 10X what Square is doing, by the way. So, this is huge. And that’s pretty much only online, they’re not really in the brick-and-mortar space to a big extent.

Moser: Yeah, not to that extent. I mean, they added over 1.5 million merchants for the quarter; they now have 28 million total. The thing that I was really impressed with, Venmo continues to gain a lot of traction. 65 million users drove +$44 billion in total payment volume; that was up 61%. Forecasting $900 million in Venmo revenue in 2021, but the thing that really stood out to me was that Venmo, in 2021, will contribute positively to transaction margin dollars. So, we’ve been talking about this a lot, we’ve got listener questions in regard to Venmo on profitability. It sounds like 2021, where your profitable Venmo is, from what I could gather.

Frankel: Yeah. So, Venmo is obviously something Square doesn’t have. I call that a big differentiator for PayPal. Just the Venmo and PayPal ecosystem is kind of ahead of where Square and Cash App is right now, I would call it. That may change. Square is trying to be a little different with its Cash App than PayPal is with Venmo. I mean, I don’t think — correct me if I’m wrong — but I don’t think PayPal has mentioned the need to, desire to put a stock trading platform on Venmo or to put bitcoin capability into it or anything like that …

Moser: Yeah, not to my knowledge.

Frankel: So, it’s two different animals. And PayPal, they’re trying to build out the payment network. Square is trying to be, kind of, an all-in-one financial company for everybody. So, that’s kind of the — I mean, they can both coexist, they serve different use cases, and there’s a lot of room for both of them to keep growing from this point. $1 trillion is not a ton when you think that the global card payment volume is in the $40 trillion to $50 trillion range. So, I mean, don’t let that $1 trillion number scare you into thinking that PayPal has done growing.

Moser: Very good point, very good point. Yeah, I totally agree. It seems like there’s still plenty of wide-open space ahead for both companies to capture. You know, another company that we talk about on the show here, and a company that I featured recently in the show when we talked about the stocks that we were going to buy next, Bill.com.

Bill.com reported for the quarter, and it was, again, another quarter of just what looked like impressive growth. Total revenue was $42.1 million, it was up 33% from the fourth quarter of fiscal 2019. We saw a nice little bump up in gross margin thanks to the business scaling and more volume going through the system. They serve 98,000 customers at the end of the fourth quarter of fiscal 2020, that was growth of 28%. Processed $25.4 billion in total payment volume on the platform in the quarter; that was up 26% from the year ago, and processed 5.6 million transactions for the quarter. At the end of the quarter they had 2.5 million network members; that was up almost 40% from the year ago.

So, again, for a business that’s really focused on that small- to medium-sized business demographic and helping tighten up back office operations, eliminate paper, create more efficiencies using that artificial intelligence, as a shareholder in Bill.com I was certainly very encouraged by that quarter.

Speaking of businesses that we each follow pretty closely, Matt, Green Dot also announced earnings last week, tell me how that quarter went?

Frankel: Well, it was pretty good actually. Their revenue was up about 21% year-over-year, beating their own expectations. The primary driver of increasing revenue is, well, there’s two actually, there’s stimulus checks, which kind of prompted a whole lot, because they do prepaid debit cards. That’s one of their big businesses; that prompted a whole lot of usage of those products. But their Banking-as-a-Service platform, which they let companies like Apple, and Intuit, and Uber use as, kind of, their banking network, because they are a chartered bank, unlike a lot of the fintechs we followed, let them use their infrastructure to offer their own banking products to their customers and employees. Like the feature that allows Uber drivers to instantly get paid is powered by Green Dot. So, that revenue was up.

And the real key thing to mention is that that’s where you really want to see the growth momentum in Green Dot, because that’s the higher margin of their revenue. So, that’s growing, their margins are up, their margin expanded by 100 basis points year-over-year actually. The new CEO who took over a couple of quarters ago, Dan Henry, is doing a fantastic job. And I know everybody was rolling their eyes at me every time I mentioned Green Dot when it was down in the $20s earlier this year, and he’s done a great job of turning the ship around since then and really focusing efforts on the Banking-as-a-Service offerings, which is where he should be focusing.

Moser: Yeah. And you know, Green Dot was dealing with its fair share of challenges earlier on, but it’s really been a tremendous year for the stock. I know that the listeners appreciate you having been able to keep up with them, because they’ve made a lot of progress, and patient shareholders are really being rewarded in exercising that patience now. So, it’s great to see that success with Green Dot.

What about MercadoLibre (NASDAQ:MELI), Matt? This is a company that we’ve often referred to as the Amazon of Latin America. To me, that is just such a small part of the story, it feels like when you look at the actual — the fintech operations or the payment operations that they have there, not to mention things like fulfillment, logistics, and whatnot. But I mean, another just tremendous quarter from — well, let’s just call it, the Amazon of Latin America, right. [laughs]

Frankel: [laughs] Yeah. Well, I call them, like, the Amazon and Square of Latin America all-in-one, is kind of how I would put it. Because there’s really two sides to their business, there’s the e-commerce platform, which is the Amazon of Latin America, and then there is the payments platform, MercadoPago, which is, you know, kind of the Square or PayPal, if you will, of Latin America. The growth on both sides of the business was extremely impressive.

This is not Amazon where it’s a really mature e-commerce marketplace, this is still in the earlier stages of growth. So, I’ll call this, like, Amazon, you know, circa 2005, if I had to put a year on it. On the e-commerce side of the business, the gross merchandise volume sold on the platform was up to 117%, so that more than doubled year-over-year. 205 million items were sold on the platform, which sounds like a lot, but go look up how much Amazon sold on its platform and it’ll seem like a tiny number.

On the payment side of the business, that’s where it gets really impressive, they did $14.5 billion U.S. equivalent in payment volume, which as we just mentioned PayPal’s numbers, that’s about one-twentieth [5%] of what PayPal does. But it’s growing at an off the charts pace, 161% year-over-year payments volume growth. And the best part is, that the payment volume that came from off of its e-commerce platform is growing even faster, that tripled year-over-year.

It’s easy enough for MercadoLibre to promote its payments platform to people already selling on its platform. So, think of this as, you know, eBay getting people to use PayPal back when they were both the same company. But it was tougher for PayPal to get people who weren’t on eBay to use their platform, and that’s kind of what you’re seeing MercadoLibre doing a great job of right now.

I became a shareholder during the pandemic, and I’d been meaning to pull the trigger on that one for years. I wish I had listened to myself a few years ago, but better late than never. And the recent results show me that this is still in the early stages.

Moser: Yeah. And, you know, I think for me, when I look at MercadoLibre, to me, it really is all about the boom in Latin America’s middle class. And I think even the room that they have still to run there. I mean, if you look at the numbers between 2008 and 2018, Latin America’s middle class expanded from 33 million households to 46 million households. And making up a far greater proportion of the overall household as well. It seems like that number is poised to continue growing, which obviously speaks volumes for the opportunity in front of MercadoLibre.

Do you think, and I tend to probably think not, but do you think there is ever the chance that they would spin that payment side of the business out as its own separate publicly traded company or do you feel like they would be better off keeping that in-house?

Frankel: For the time being, they should keep it in-house. I mentioned the PayPal-eBay example, I think when it becomes kind of a more mature business like PayPal and eBay, where the growth within the platform is kind of limited at that point, things like that, then it might be worth looking at spinning it out. But for right now, it’s a very valuable asset that they’re doing a great job of growing alongside their core business.

Moser: Yep, yep, it makes sense. Well, before we wrap things up, Matt, let’s give our listeners one to watch for the coming week. What’s your one to watch this coming week?

Frankel: Well, this is my — when we did the recent stocks we want… you mentioned Bill.com, I’m going with Lemonade, which reports its earnings on Wednesday. That was my recent stock I bought. This will be their first earnings report as a publicly traded company. The performance has been pretty good for the stock right now. I want to see if their business results are backing that up, if they’re still growing like I think they’re capable of, and if management is still making the right moves. So, I’ll report back next week after they report their earnings, but that’s what I’m keeping my eye on this week.

Moser: Nice. Well, I’ll go with a company that’s a little bit less financial — it’s not directly financials related, but it is a company that is very much tied to the consumer, and one that’s been dealing with a lot of, not bad news, but just a difficult situation. Disney earnings come out later this week on Thursday, clearly, they’ve been, you know, on the [laughs] one side of coin with their focus on streaming and entertainment, I mean, the business has really done very well. The flip side of the coin there is that, you know, the parks have been closed. And that has been a real anchor, particularly with what’s going on in California. I mean, they can’t get anything going out there.

You know, you were telling me the story, you guys went down there recently to Disney World, Orlando and it sounded like they were taking things very seriously and had a pretty good thing going there. So, it was encouraging to see that they were able, at least, to get some traffic going there. But the stock responding to this vaccine news today, obviously, very positively. Stock, right now as we’re taping up, about 12%, [laughs] that’s a big move for a company like Disney. So, I’m going to be very encouraged to see what their language is like on that call regarding this vaccine news and the state of the Park’s business in general, so I’ll be keeping an eye on that.

But, Matt, I think that is going to wrap it up for us this week. We had a little bit of a long show today. We had a lot to talk about. Man, I appreciate you sitting in and taking care of us today.

Frankel: I’m enjoying watching all the real estate stocks go up. You know, I’m the advisor on our new Real Estate Winners service, Real.Fool.com, if anyone wants to check it out. But, I mean, it’s a great day for REITs, so we’re having a fantastic time watching it today. Some of our Real Estate Winners they’re really living up to their names.

Moser: [laughs] That’s terrific. Well, man, more power to you, and I hope the ball keeps on going in that direction for you.

Remember folks, 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.

Thanks, as always, to Tim Sparks for putting the show together for us. For Matt Frankel, I’m Jason Moser, thanks for listening and we’ll see you next week.

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