Rising interest rates have created significant headwinds for younger, small cap companies, so I have made a conscious pivot towards quality, asserts Adam Johnson, who serves as portfolio manager for the Adviser Investments American Ingenuity strategy; separately, he is the editor of the Bullseye Brief.
I remain optimistic. Our economy is powering ahead at full employment, and record earnings are still surprising to the upside. Overall, there is far more to like than to fear. Our north star of "American Ingenuity" lights our way forward. Here's a look at 4 stocks in our portfolio that offer exposure to the digitization of money.
Affirm Holdings, Inc. (AFRM) dominates Buy-Now-Pay-Later (BNPL) in the US. The company catalyzes the next-generation e-commerce at unprecedented scale.
The stock tripled between August and October on news of groundbreaking partnerships with Amazon (AMZN) and Apple (AAPL), having already established 35% market share thanks to strong relationships with dozens of high-volume retailers like Wal-Mart (WMT), Wayfair (W) and Shopify (SHOP), the e-commerce enabler for 12,500 vendors on Facebook (FB).
Revenues are on track to rise 50% for a second year as more consumers opt for Affirm’s interest-free, no late penalty payment offerings. Affirm’s competitive advantage derives from a proprietary credit algorithm which enables it to quickly identify more borrowers with lower default rates.
As a result, Affirm helps merchant partners capture additional high-value customers, becoming a critical partner in driving sales growth. BNPL accounts for just 2% of US retail volumes, yet one-third of Millennials say it’s their preferred method of payment. Last year the stock made a complete roundtrip from $50 to $180 to $50. It’s a wonderful story and this too shall pass.
Block Inc. (SQ), formerly known as Square, is a top-tier B2C and C2C payments provider growing double digits and offering a significant runway for growth at low valuation.
The firm operates two fast growing businesses: Payments processing for merchants (Seller) and money management for people (CashApp). You’ve probably seen Square’s little white device that turns an iPhone into a cash register, but it’s more than that… real-time sales data feeds inventory replenishment, payroll, etc.
The consumer-facing side of the business is giving PayPal (PYPL) a run for its money, and there are significant synergies between the two operating units. The company recently reported significantly stronger than expected results, as 2021 revenues accelerated 110% YoY. While Omicron likely pulled some spending forward, management sees Seller gross profits tracking +45% and CashApp gross profits tracking 21%.
The recently closed acquisition of Buy-Now-Pay-Later provider Afterpay could catalyze additional growth in 2022. I will also note that the stock is down 70% from its high and trades at 3.4 times sales, compared to an average of 7.5x over the past five years. The stock is growing and it’s cheap. Growth meets value.
Coinbase International Inc. (COIN) has quickly established itself as the world’s dominant cryptocurrency platform, providing fully-integrated trading and transfer, as well as completely secure custody and wallet services. It is is becoming the industry backbone as institutional adoption accelerates.
Currently, 11% of all crypto transactions occur on the Coinbase platform. As a result, no other company comes close to offering its one-stop suite of services, especially for large institutions transacting significant volume 24/7 across 50 coins.
The company was founded six years ago and has developed proprietary operating systems which would be extremely hard to replicate. In the same way that Amazon created AWS and now dominates internet transactions, Coinbase has created software and transactional protocols used by customers and competitors alike.
The company is profitable and cash-rich, yet trades at a 50% discount to fintech peers. I believe the discount is unwarranted, especially since the topline will likely grow as Coinbase adds new fee-based services.
My target of $450 reflects a scenario, where bitcoin averages $40-45k over the next 12 months, yearend revenues reach $6.3B, and investors decide they are willing to support a valuation which is more in line with peers (12x p/sales vs 5x).
SoFi Technologies, Inc. (SOFI) is the best managed neo-bank targeting Millennials and GenX borrowers with strong credit and rising financial needs. It provides a complete suite of financial services on a single app, including cash management, checking, savings, trading, credit cards, loans, loan refinancing and investment advice.
SoFi’s 2.5M customers are predominantly Millennials and Gen Xers with strong credit, who consider themselves digitally native and seek complete control of their finances from a trusted mobile device. Critically, these aspirational consumers rely on SoFi for multiple products, creating a powerful flywheel effect which drives margin expansion and top line growth.
Sofi also operates a third-party payments and processing platform called Galileo, licensing its software to other online banks in much the same way Amazon Web Services facilitates digital commerce for other retailers.
Anticipated revenues of $1.5B this year represent 50% growth and the company will likely become profitable this year or next, aided by its recently approved application to fund itself as a deposit-taking bank. Managment is highly pedigreed and appears to have the goodwill of Wall Street, a noted positive for a newly public company.