the conglomerate of Warren Buffett, Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B), has a huge portfolio of stocks worth over $ 300 billion. Unsurprisingly, much of the attention surrounding it go to Apple, which is Berkshire’s largest holding by far and has performed remarkably well over the past few years.
Come second east Bank of America, a huge financial institution serving consumers and businesses around the world. This big bank stocks did well for Buffett, easily beating the S&P 500 since Berkshire bought their first stake in 2011.
But if you’re going to follow Buffett’s lead and make Bank of America your biggest holding in the financial industry, I’ve got even better action. As good an investment as the mega-bank has been, it is derisory compared to the quality of fintech pioneer PayPal funds (NASDAQ: PYPL). Here’s why I think investors would benefit from considering this digital payments giant – and why it should appeal to Buffett himself.
Superior business model
PayPal’s stock has climbed nearly 700% over the past five years. This compares to a less exciting price of 157% appreciation for Bank of America, and it demonstrates both the superiority of PayPal’s business and the potential of the industry it serves.
Both of these companies have strong competitive advantages, including well-known brands, high customer switching costs and advantages of scale. But PayPal stands out first for its massive and growing network effect: the more people use the PayPal platform, the more they want to register and the more value this platform grows. In the last quarter, PayPal had 32 million active merchants and 371 million active consumers on its platform. It would be extremely difficult for any business to duplicate what PayPal has built. In the last quarter, the company processed a whopping $ 311 billion transaction volume. Bank of America today serves 66 million personal and small business customers. That’s up from 47 million five years ago, but far from PayPal’s reach.
Second, while traditional banks like Bank of America operate in a mature and fairly commoditized industry – one bank is no better than another for most consumers – PayPal’s success has come to fill a significant void in the market. financial services sector. Merchants wanted a simple, turnkey solution for accepting payments online that they simply couldn’t find elsewhere. And consumers, who already had unlimited banking services, wanted a safe, secure, and easy-to-use tool to help them with their daily financial lives.
Another very important advantage that PayPal has can be found by consulting its balance sheet. Since the fintech business is primarily a payments processor, its credit risk is significantly lower than that of Bank of America. To elaborate, as of June 30, PayPal’s $ 74 billion in assets consisted of just over $ 3 billion in outstanding consumer loans. Bank of America, on the other hand, unsurprisingly has a whopping $ 3 trillion balance sheet, made up of over $ 900 billion in loans. Being less influenced by interest rates naturally makes PayPal less sensitive to macroeconomic factors.
Even though Buffett has been notoriously opposed to technology as an investor, he knows an economic divide when he sees one. While Bank of America has been a major player in its industry, PayPal has been a leader in a very lucrative field.
Spectacular growth prospects
PayPal’s superiority is further enhanced by the fact that its growth has far exceeded that of the banking giant. Sales over the past five years have grown at a rate of 15% or more per year, while profits have tripled during that time. It’s no wonder the stock performed so well.
PayPal is riding the centuries-old shift from cash to digital payments. As a higher percentage of business is done online, the business should continue to thrive. CEO Dan Schulman believes PayPal can someday amass 1 billion active accounts per day. And the company’s ability to introduce new and innovative products, such as QR codes to merchants, verification with crypto, and the popular buy now, pay later option, all reinforce its value proposition. for users.
Management expects PayPal’s revenue and earnings per share to increase 20% and 21%, respectively, in 2021 compared to the previous year. And the company is well on its way to easily surpassing $ 1,000 billion in total annual payment volume, which is an extraordinary achievement in itself. Active accounts are expected to end the year at 430 million.
PayPal shares are trading at an upper valuation, commanding a futures price / earnings ratio of around 56 at Wednesday’s close. But as I explained above, the price might be worth it. The fact that the stock fell after second quarter earnings and remains down 5% since that July 28 announcement is more appealing to potential investors.
When you stack the credit for PayPal’s investment with one of Buffett’s largest holdings, Bank of America, it’s easy to see which company has the upper hand. The burgeoning fintech leader is the big winner, in my opinion.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.