When it comes to buying stocks in companies that are pursuing disruptive innovations such as digital wallets, the investor to follow is Cathie Wood. One of the exchange traded fund of ARK Invest is the Ark Fintech Innovation ETF (NYSEARCA:ARKF).
This ETF is overweight on companies that are innovating in the field of finance. This includes transaction innovation, blockchain, among others. The Fintech ETF however has the biggest exposure to companies having digital wallets.
The reason for being bullish on digital wallets will be clear if we look at some estimates. According to World Payments Report 2020, the number of digital wallets will increase from 2.3 billion in fiscal year 2019 to 4 billion in FY2024.
A Juniper Research study also estimates that total spend through digital wallets will exceed $10 trillion in 2025, up from $5.5 trillion last year.
With this growth expected, it’s a good time to consider some digital wallet stocks for the long term. It also makes sense to follow Wood with most of ARK Invest ETFs delivering stellar performance since inception.
In the digital wallets space, let’s talk about these four stocks that are among the top holdings in the Ark Fintech Innovation ETF.
- Square (NYSE:SQ)
- Sea Limited (NYSE:SE)
- PayPal Holdings (NASDAQ:PYPL)
- Adyen (OTCMKTS:ADYEY)
Digital Wallets: Square (SQ)
As digital wallets witness a rise in penetration, SQ stock is among the top names to consider. The stock might seem expensive at a forward price-earnings-ratio of 200x. However, any dip has been followed by a sharp rally as the company’s growth outlook remains bright.
If I have to point a single reason to be bullish on Square, it’s the company’s Cash App. In December 2018, the app had 15 million monthly active users. That number swelled to 36 million as of December 2020. Furthermore, 80 million customers have transacted with Cash App. These are potential customers and provide ample headroom for growth in the user base.
As the adoption of Bitcoin (CCC:BTC-USD) increases, Cash App is positioned to benefit. The company had 3 million active Bitcoin users as of 2020. Just for January 2021, the company added 1 million new Bitcoin users.
For 2020, Cash App reported revenue of $5.97 billion and gross profit of $1.23 billion. However, Bitcoin revenue and gross profit was $4.57 billion and $97 million respectively. The most important point here is that Cash App revenue was $1.4 billion with a gross profit of $1.1 billion.
Clearly, the Cash App promises to be a cash flow machine as active users swell. I am not surprised that SQ stock is the top holding in Cathie Wood’s Ark Fintech Innovation ETF.
Sea Limited (SE)
SE stock is up nearly 400% in the last year. The stock is also among the top three holdings in the Ark Fintech Innovation ETF.
Sea Limited gives investors exposure to the fast-growing e-commerce market in Southeast Asia. In addition to e-commerce, the company’s business segments also include digital entertainment and digital financial services.
For the fourth quarter of 2020, the company reported more than 10 million monthly paying users for mobile wallet service in Indonesia. The total mobile wallet payment volume for FY2020 was $7.8 billion.
In the digital wallet business, the company has partnered with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). The company’s mobile wallet will be among the payment options for Google Play Store in Indonesia. The company has already partnered with Google in Thailand. With a big addressable market in Southeast Asia, the growth outlook seems robust.
The company’s digital financial services however reported an EBITDA level loss of $511 million. With the service still at an early growth stage, I don’t see cash burn as a concern. The cash burn from the e-commerce and digital wallet segment is being offset by robust EBITDA from the gaming segment.
Sea Limited also ended 2020 with a robust cash buffer of $6.2 billion. This gives the company ample financial flexibility to pursue aggressive growth. Once the e-commerce and digital wallet segment deliver positive EBITDA, SE stock is likely to surge.
Digital Wallets: PayPal Holdings (PYPL)
As of April, Ark Fintech Innovation ETF held 698,217 shares of PayPal. The company is among the top digital wallet players. PYPL stock has surged by 126% in the last year and it seems likely that the stock will remain in a long-term uptrend.
As of 2020, PayPal reported a total of 377 million active accounts. With global presence and services for consumers and merchants, it’s likely that active accounts will continue to increase. For the year, the company expects to add 50 million active accounts.
In terms of the growth outlook, the company believes that there is a total addressable market of $110 trillion. PayPal is targeting $50 billion in revenue by 2025. These factors make PYPL stock attractive for the long term.
Specific to digital wallets, Venmo is a part of PayPal and is a global leader in digital payments. Cash App reported 36 million active users in 2020. For Venmo, the number of active users is currently 70 million. On April 20, Venmo also introduced crypto on the digital wallet. With wider cryptocurrency adoption, it’s likely that this move will translate into further growth in the number of active users.
Overall, PYPL stock is worth holding in the long-term portfolio. New initiatives such as “buy now, pay later,” Venmo credit cards and the introduction of crypto are likely to attract global users.
ADYEY stock also find a place in the top 10 holdings in the Ark Fintech Innovation ETF. At a P/E of 250x, the stock seems expensive and investors can wait for some correction before considering exposure.
Adyen provides a single platform to accept payments on any device. For 2020, the company processed total payment volumes of 303.6 billion euros, which was higher by 27% on a year-over-year basis. Further, net revenue for the year was 684.2 million euros.
Importantly, the company’s revenue growth in North America was 70% as compared to 22% in Europe and 30% in APAC. With a global presence and strong growth in one of the most attractive markets, ADYEY stock looks attractive.
Recently, Adyen also started offering buy now and pay later service to retailers in collaboration with Afterpay (OTCMKTS:AFTPF). The latter has 13 million customers globally and 1.6 million shoppers in the U.K. The BNPL segment also looks attractive from a long-term growth perspective.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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