DeHaemer’s “Next FAANG” — What are “The 4 MVPs of the Tap & Go Revolution?”

by Travis Johnson, Stock Gumshoe | March 26, 2020 1:01 am

Latest ads for Bull and Bust Report call the coronavirus drop a "buying with both fists" opportunity in these stocks.

A version of this story first appeared on January 22, when we first saw Christian DeHaemer[1]’s ad. The ad has been very lightly updated in recent months and is being heavily promoted now, so I’ve gone through and updated this article and my thinking to reflect the coronavirus[2] collapse and any updates the companies have provided since January. Enjoy!

Here’s a sample of a recent DeHaemer email pointing at the ad:

“… if you are a long-term investor like me, this pullback is a gift.

“It’s a chance to get your hands on some stellar stocks at a great price.

“That includes my top four stocks for 2020. I was already bullish on these stocks when the market was at record highs.

“Now that we can buy them at a discount, I’m buying with both fists.”

And now, on to the actual pitch, largely unchanged since January….

The “end of cash” story has been around for a long time, and it has fueled several waves of investment teaser ads over the past decade or so… which led me to wonder whether DeHaemer is pitching anything new or different in the ads for his Bull and Bust Report (currently $99/yr).

The big picture notion that “cash is dying” is not a shock or surprise, of course, we’ve all noticed that we use less cash and see card terminals in more places, and do so much more of our shopping online, but here’s a little taste of the ad to get you started:

“Don’t be surprised to find that in less than five years, money as you know it will be a thing of the past.

“Millions of Americans like you and me will be carrying just one thing: their mobile phones.

“And you know the four MVPs I mentioned earlier?

“They are the SAME companies set to dominate this massive $100 trillion industry — at home and abroad.

“Think of this as your one and only chance to get positioned in the ‘Next FAANG…’

“Before the stocks go absolutely ballistic.

“Like grabbing a slice of Apple before it shot up by 1,600%…

“Amazon before it skyrocketed by 3,100%…

“Or Netflix before it zoomed up by 5,700%.

“Here’s a surprise, though…

“You won’t find a single one of the ‘Usual Suspects’ on my exclusive list of top buys today.”

So how is it that these companies are making money on the “death of cash?” More from DeHaemer:

“Behind the scenes, my four MVP companies had designed an ingenious system to siphon off profits from practically every digital transaction made around the world.

“The ‘New FAANG’ companies are busy cornering a $100 TRILLION market for themselves.

“Even if they were to mop up a tiny one-quarter of 1% of this gargantuan amount…

“Which is very possible…

“That’s $250 billion straight into their pockets.”

That’s essentially what every payment network and payment processing company does — they charge fees that amount to a fraction of a percent of the transaction. No surprise there.

And we’re told that these “MVPs” are going to shoot higher soon, because they’ve identified a “catalyst” that will spark the stocks….

“SPECIAL ALERT: The New MVPs are about to get another unexpected boost by February 29 March 25, 2020.

“That’s when I expect Facebook’s much-hyped Libra project to be dead in the water[3]. …

“Libra’s days are numbered. I expect it to go down in flames no later than February 29 March 25, 2020.

“Once it does, that will add even more fuel to the prices of our “New FAANG” stocks. Why? Because there will be one less competitor to split up to $100 trillion in revenue with!”

I can’t say that I ever took Libra very seriously, frankly, but it is still not quite dead yet — they have been losing partners, presumably both because this facebook blockchain[4] money transfer project has been a lightning rod for regulatory criticism and because it hasn’t really moved forward beyond the “concept” stage. I don’t think there was ever a huge risk that Facebook would earn a big portion of the digital payments business, but it is still possible (payment systems and networks have evolved differently in different markets, and the “FAANGs of China[5]”, particularly Tencent and Alibaba, dominate digital payments in that country).

And this is basically a “marketing overpromise:”

“To everyone’s surprise, the old FAANGs have handed control of the lucrative payments opportunity to a new supergroup called the MVPs.

“I expect their share prices to go ballistic on or around February 29 March 25…
When Facebook’s Libra venture goes belly-up.”

Thankfully for the lawyers, “ballistic” does not have a precise definition, and “on or around” could also mean, well, anything. There’s a reason why ads lack precision on these points, even when they try to give you the idea that they know exactly what the future will hold… and that it holds imminent wealth. This change to the date was one of the few real updates in the most recent version of that ad that I’ve seen.

And yes, Facebook’s Libra blockchain project has been slowly withering for nine months now as partners pull out, though the attention it got was always wildly greater than its actual progress or, in my mind, potential.

So what are these “MVPs” teased in the Bull and Bust Report ad? Well, they aren’t the “usual suspects” in that they aren’t FAANG companies… but they are certainly the “usual suspects” for anyone who’s been involved in or researching the digital payments space over the past five years.

Which means you’ll probably be a little disappointed to hear the Thinkolator’s results: DeHaemer’s MVPs are, in the order of the acronym, Mastercard (MA), Visa (V), Paypal (PYPL) and Square (SQ).

Not a tiny upstart or unknown company in the bunch, right? Also, sadly, not a company that I own (though I’ve owned a couple of them in the past), because they’ve all been extraordinary performers.

They aren’t small companies anymore, nor are they cheap by any rational assessment (though truly, not many companies that have any kind of growth are cheap right now, even after a 30% drop in the market) — Mastercard is still a $260 billion company after the March collapse, and that still makes them the “little brother” to Visa’s $370 billion (both are down by close to 20% from the February peak), and even upstart PayPal is at $116 billion as they get close to the five-year anniversary of their split with eBay. Only Square could really even be called a “midcap,” with a market cap of about $25 billion.

But yes, they are dominant — or at least, the big guys are. The days of any kind of real opening to disrupt Mastercard and Visa appear to be long past now, the revolution of “tap and pay” and paying with your cell phones still works almost entirely because it connects to those legacy Mastercard and Visa payment networks that incorporate essentially every merchant and bank in the world. That’s a tough club to break into.

Here’s an updated chart, including the peak and swoon over the past couple months now, of what those four stocks have done in the 4+ years since Square went public (which wasn’t long after PayPal separated from eBay):

[6]

And in case you’re curious, that’s generally a little better than the performance we saw from the FAANG stocks over that same time period, on average…

[7]

MA and V are each roughly 1% of the S&P 500, which means they’re among the dozen or so largest companies in the world… so the only ones that are really substantially larger are, in fact, the FAANG stocks (OK, fine, and JP Morgan and Berkshire Hathaway and Microsoft and one or two others).

It’s hard to argue with at least the big three of this group — Square is in a more competitive situation and is less established, and that’s reflected in the volatility of the stock, but it is a strong emerging brand for retailers, and as more small retailers during the coronavirus panic start to rethink how important it is to have an online retail option and be able to easily take card payments (our local shops have long had the little signs up saying “please pay cash to keep it local” for small purchases — but when they had to shift to delivery or online orders, those with Square or a similar product had a head start). I’d guess it will probably make more incremental progress in building its customer base, but we shouldn’t discount the competitive pressure of so many terminal companies trying to acquire customers… payment system customers are hugely lucrative over the long term, because they’re sticky and you therefore get the inside edge on a little share of the payment processing fees for a long time, but everybody knows that so acquiring customers is probably going to continue to be very expensive.

But it’s also hard to argue that Mastercard or Visa are particularly undervalued — they carry FAANG-like valuations and profit margins (50% profit margins, 13-15% revenue growth), and they could certainly keep chugging along, but they’re not surprise stocks that are likely to double on a piece of exciting news… they’re among the most widely-owned and widely-followed stocks in the world, and they traded at roughly 30-35X forward earnings back in January when we first covered this ad, with the recent weakness in stocks bringing them down to “only” 25-30X forward earnings. And those earnings will quite likely fall, because travel is halted and restaurants are largely closed or reduced — yes, online shopping has boomed, but almost everything is on credit or debit cards now and the volume of transactions in general is probably going to drop pretty dramatically for a little while.

Square (SQ)[8] had a nice bounce recently because they’ve announced that the COVID-19 impact will not be as dramatic as some might have feared — but that’s because the stock fell by more than 50% in the initial panic. Part of that is some relief that their Cash app for transferring money between people is still growing and doing well even as the merchant network is taking a hit, and part of it is their guidance for the first quarter, updated on March 24th, that has shrunk by less than 10% since their last update, with revenue guidance still close to what analysts are expecting. That’s just one quarter, and we don’t really know how long this retail “pause” will last or how customers will behave in the recovery from this “stay at home” period, so things are very fluid still — but any numbers or reassurance from companies these days is so far being taken very well. Guidance and updated numbers make things seem manageable, and predictable, and that’s really all that investors want these days.

PayPal (PYPL)[9] last updated investors in late February, when the coronavirus was still primarily an “international trade” issue — this is what they said, per Briefing.com:

“PayPal’s business trends remain strong; however, international cross-border e-commerce activity has been negatively impacted by COVID-19. We currently estimate the negative impact from COVID-19 to be an approximate one percentage point reduction, on both a spot and foreign currency-neutral basis, to PayPal’s year-over-year revenue growth for the first quarter, as compared to the revenue guidance provided on January 29, 2020. Stronger performance quarter-to-date across our diversified business is partially offsetting this one percentage point negative impact.”

Mastercard (MA)[10] this week suspended its 2020 outlook and lowered their revenue forecast for the first quarter — so while they had been expecting 9-10% growth in net revenue in the first quarter of this year, that expectation is now for “low single digit” revenue growth, which is better than I would have expected… and they’re also cutting expenses to match that slower growth.

Visa (V)[11] reduced its outlook way back on March 2, when the world was completely different than it is today, and at the time the biggest impact was on travel into and out of Asia[12], and they indicated that things hadn’t “bottomed out yet” at the time, which now looks like a wild understatement. They expected at the time that quarterly revenue growth would be about three percentage points lower than they had previously anticipated, and I imagine they’d be a lot more cautious if they had given that update three weeks later.

These are all strong companies, for sure, but if I were picking just one I’d likely land on PayPal as being in somewhat of the “sweet spot” — they have a dominant position in online payments and a very trusted brand, right up there with Visa and Mastercard, and they’re also growing substantially faster (20%+ instead of 14%) and they trade at a very similar valuation to their larger partners and competitors. Being a faster grower, and having less exposure to in-person retail, probably means they’ll take a little less of a hit than MA and V and SQ during this retail “pause.”

They will all survive even a really bad short-term recession just fine, though Square’s valuation is the most challenging if retail sales stay low and keep falling for longer than a couple months… and though Mastercard and Visa are certainly quite exposed to restaurant and travel expenditures, at least they’re not quite as dependent on those things as American Express (AXP)[13] is (AXP fell more than 50% peak to trough over the past month, MA and V were down more like 35% at the worst… so far).

That’s just my take, though, and these are all companies that you probably have some personal exposure to when you shop… and are certainly stocks you can research quite thoroughly on your own. I expect the trends driving them forward will remain quite robust, but it’s also true that at 25-30X forward earnings you’re already making the assumption that those trends will continue and that any disruption from outside events (coronavirus) or new players (like blockchain) will either be minimal or will absorbed by the goliaths (it is, after all, awfully hard to sneak up on a $300 billion business and steal their bread and butter… Visa and Mastercard are not going to be “surprised” by any of the hundreds of blockchain-based payment system hopefuls).

What matters for your money, though, is what you think — do you believe that the “MVPs” will continue to have a run that reminds you of the huge investment success that the FAANGs have been over the past decade? Let us know with a comment below. I’ve left the comments attached from the original version of this article, so you can see what your fellow investors have been thinking about these over the past couple months.

Disclosure: I own shares and/or call options[14] on Berkshire Hathaway, Alphabet, Amazon and Apple among the companies mentioned above. I will not trade in any covered name for at least three days, per Stock Gumshoe’s trading rules.

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