by Travis Johnson, Stock Gumshoe | April 8, 2019 1:06 pm
The latest pitch from Marc Lichtenfeld begins with a walking tour of Palm Beach, which is just cruel to those of us enduring mud season in New England, but, more importantly, it also comes with a good ol’ fake deadline of midnight tonight… so I guess I better cover this one quick! Fortunes await!
The ad is for Lichtenfeld’s Stock Sequence Trader, which I’ve never heard of before — it’s pricey ($2,400/yr, no refunds) and seems to offer a trading system based on just one “ignition sequence” for particular stocks, so I’d imagine that it uses some similar strategies (like options speculation) to Lichtenfeld’s other “high end” trading service, Lightning Trend Trader.
You’d never spend $2,400 just to find out a ‘secret’ stock, right? Especially if they won’t give you your money back if you change your mind next week or decide the newsletter isn’t your cup of tea at all? That would be crazy. So let’s figure out what the stock is, chat about it a bit, and then you can decide what to do. Maybe you’ll love Lichtenfeld’s strategy and will want to rush to subscribe, that’s your call, but don’t do it just to learn a “secret.”
Heres what got our attention right off the bat…
“Why I’m Betting $5.5 MILLION That This Company* Will HAND YOU 859% in a Year!
“WARNING: To Take Me Up on This Bet, You MUST Act Now Before a Critical April 24 Event Ignites This Stock to the Moon.”
And then more hype…
“It’s a big bet, but I’m willing to do it because this fintech company has more profit potential than any stock I’ve seen.
“To start, this company is backed by some of the most powerful people in the world.
“In fact, it was founded by a brilliant executive team known as, ‘The Richest Group of Men in Silicon Valley.'”Are you getting our free Daily Update
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He says these folks are responsible for backing huge names like Facebook, LinkedIn and Tesla early on.
So what other clues do we get?
Well, we know it’s a fintech company….
“These guys also have perhaps the greatest track record ever in turning small, new companies into giant winners.
“Yet their fintech company I’ll tell you about today could potentially make ALL OF THEIR previous wins pale in comparison.”
“FinTech” is a pretty broad term, of course, you could use it for anything from bitcoin miners to newer card processing companies like Square and Stripe to new lending companies like Prosper or Lending Club or SoFi to start, but finance incorporates a huge number of companies.
So what else do we learn about this one? Clues, please!
“I calculate record-high revenues will top $19 billion in the year ahead…
“And this company has its sights on a new market worth $642 BILLION….”
OK, so it’s a pretty big company. Many service companies in finance have very tight profit margins, but still, $19 billion is a big revenue number. There are fewer than 150 companies in financial services that have revenue greater than that.
More? How about some details on that “big event” coming in a couple weeks?
“You see, the company is poised to experience a major, once-in-a-lifetime event by Wednesday, April 24, blasting it skyward.
“Make no mistake… This singular event is THE MOST POWERFUL STOCK CATALYST there is.”
Ooo, ooo, what is it?
“This event happens ONCE in a company’s history… but when it does, look out.
“Because it can send share prices soaring like nothing else.”
He includes some charts to emphasize this, though those are clearly returns not from holding the stocks, but from betting on short-term price movements using call options. He cites Wabash National (WNC) as posting a 1,300% gain, for example, but in the time period noted the stock only doubled.
What was the catalyst? Those three names, Wabash and Aircastle (AYR) and Greenbrier (GBX) don’t narrow it down quite enough… but it’s likely to be dividend-related.
And the further examples he provides do make it very likely that what he’s mostly talking about as an “ignition event” is a company initiating a dividend — announcing that they will pay out a dividend to investors for the first time. So apparently he’s talking up an option bet on a fintech company that he thinks will announce a dividend in a couple weeks.
There may well be other kinds of “ignition events” that he’s looking for — he refers to Skechers (SKX), for example, as a stock he recommended for an “ignition event” early this year, but SKX has not announced a dividend. It could, I suppose, and maybe he was betting that they would since they’re cash rich and have been beating estimates, but his bet worked out regardless of the reason (he claimed 205% returns, which would have been achievable if you bought the right call options before the February earnings beat — the stock itself has risen about 40% on the year).
More clues about which company this is? He again references those “masters of the universe” folks who helped build the company, but begins to clarify that these were actually executives and company builders, too, not just venture capital investors.
What these 13 Silicon Valley geniuses did was join forces to attack the ever-so-slow-to-adapt… GIGANTIC… banking industry.
“Their fintech company – which I refer to as the #1 FinTech – is on a mission to revolutionize the world of money as we know it.
“Here’s why I believe this #1 FinTech could very well end up becoming the biggest HOUSEHOLD name on the planet.
“Bigger Than Amazon, Apple and Netflix… COMBINED?”
And apparently it’s already pretty well-established…
“This FinTech company is eating up market share at an unprecedented pace.
“In the latest quarter, the number of new, active customers it brought on board grew by 45 million.
“Total cash flowing through its business grew by $1.2 billion… up 378% from the year before.
“The big banks are terrified of this new #1 FinTech because it’s stealing all their business.”
“It’s got a huge war chest… with $10.5 billion in cash and ZERO debt….
“… the early business model was actually voted among the ‘top 10 worst business ideas of the year,’ according to Medium.
“Simply put, financial and venture capital firms arrogantly assumed this company would drown trying to compete with the old guard in finance….
“But they were so wrong… they couldn’t have been more wrong if they tried.”
So what does this business actually do? More from the ad:
“This #1 FinTech created a brand-new way of moving money, helping businesses reach customers, increasing security and safety of money online…
“The company created lightning-fast, secure payment solutions. Something the world had never seen.
“It saw its user base jump from zero to 100,000 users in just a one-month span of going live…”
And it has continued to evolve…
“It added instant personal financing options to its product line.
“And it’s quickly becoming the go-to source for small business lines of credit.
“In other words, this #1 FinTech is making traditional banking obsolete….
“This #1 FinTech is now processing nearly 10 BILLION transactions in a year…”
There are a few other clues, but we’ve got more than enough now. I should, though, note that later on in the ad Lichtenfeld does finally clarify that yes, the “ignition event” is the initiation of a dividend…
“I define an Ignition Event as the precise moment a company initiates a dividend for the first time.
“The second a company announces it’s about to pay a dividend for the first time… investors go crazy.
“And here’s why…
“Not only are shareholders set to receive a BONUS on their investment… and a steady stream of dividend income from their shares going forward…
“But the initial dividend announcement is a sort of kickoff for the stock’s best years.”
Will that be the case for this “#1 Fintech” stock? I have no idea, but I can tell you that the stock Lichtenfeld is teasing is PayPal Holdings (PYPL), the dean of fintech.
PayPal is obviously not a startup, they’ve been around for about 20 years — though it’s certainly true that the founders of PayPal went on to do amazing things and make incredibly lucrative bets (often with the huge windfall they got when PayPal was bought by eBay).
That august group of accomplished and very wealthy founders and early employees has little to do with the PayPal of today. The old “PayPal Mafia” of Elon Musk, Peter Thiel, Reid Hoffman and a dozen or so other prominent early PayPal employees or founders became company builders and venture capitalists and surely went on do do amazing things elsewhere… but they aren’t guiding PayPal today — they largely left to do new things once the early excitement and growth at PayPal had led to the acquisition by eBay and it had become a much more “corporate” company (the current CEO of PayPal, for example, came from American Express). I don’t think any of the “Mafia” are still involved with PayPal.
PayPal is indeed a huge fintech company, with a market cap of about $125 billion, and they could afford to pay a dividend if they chose. I don’t know if they will, but their next earnings report is expected on April 25, so it’s possible that news could come then.
It’s also a growing company, though it’s not without competition. PayPal for years was owned by eBay (EBAY), and we’re now at the point that the separation really becomes meaningful — the shares were spun out of eBay back in 2015, but eBay’s position as the preferred payment processor for eBay transactions ends in 2020. PayPal has spent the past few years diversifying away from eBay, and that does seem to be working — there are more and more physical stores where you can pay with eBay, and it is the most common “alternative” payment system offered by online retailers (we’ve used it for more than a decade here at Stock Gumshoe, for example, and while less than perfect it has continued to improve), but there’s a lot more choice in that market now than there was ten years ago.
The latest “brand” at PayPal that has gotten a lot of attention is Venmo, the peer-to-peer payment service that seems to have broken through in a very competitive field (letting you send $50 to your cousin, for example, or easily split a dinner bill with friends), though that’s not likely to be financially meaningful for them for a while. Most peer payments don’t include fees, unless you use a credit card, and there are lots of other popular peer-to-peer payment apps like Square Cash and Zelle, with other entrants likely as everyone can obviously recognize the “network effect” of peer to peer payments (everyone’s willing to lose money on this business, because it’s clear that customers aren’t likely to use more than one or two networks, so whoever builds the biggest network will probably win in the end).
And sure, it would be crazy to bet against PayPal/Venmo given their scale, though that doesn’t mean a better idea won’t come along. Likewise, PayPal is indeed getting into a new $650 billion business in global remittances with their Xoom subsidiary, though that’s not a brand new business (they bought Xoom back in 2015, ideally it competes with higher-fee services like Western Union). I don’t know whether that’s the market Lichtenfeld is referring to as their next growth market, but it seems likely.
PayPal has been a popular stock for the past few years and has risen more than 150% since 2017 while net income has risen only about 30%, so it’s not a cheap stock (it doubled in 2017, then rose another 30% so far this year, though 2018 was largely a flat year). It may look fairly compelling compared to the younger startups like Square (SQ), since it trades at “only” 8X sales (versus SQ’s 9.5X) and is actually profitable (forward PE of about 37 for PYPL and trailing PE of about 60… SQ is not currently profitable but is expected to be so this year, with a forward PE of about 100), but compared to more traditional financial services companies and payment processors it’s awfully expensive.
What really seems to have happened over the past couple years, more than anything, is that PayPal has gradually gotten to a similar valuation to the two most dominant “fintech” networks in the world, Mastercard (MA) and Visa (V). That makes some sense if you believe that the duopoly of MA and V is going to make room for a third player in PayPal, which is possible, though certainly PayPal still relies on MA and V credit card payments for a large number of its transactions and has to pay those two networks for that access.
The challenge in that comparison is that MasterCard and Visa are dramatically more efficient than PayPal — they already own a global near-duopoly, and much of what we would think of as their work is really done by their member banks, so they don’t have to spend on a lot other than on security, some R&D to improve security and fraud protection and transaction speed, and marketing.
That’s probably why Visa and Mastercard trade at 16-17X sales despite having revenue growth of “only” about 10-15% — they have massive gross margins in the 80%+ neighborhood and profit margins of more than 50%. PayPal, in contrast, has much higher expenses relative to revenue — their gross margin is 45% and their profit margin 14%, which would mean that for PayPal to be more compelling than Mastercard and Visa you’d have to see something growthier in their future story — it’s not just current numbers that make the case, not when PayPal has revenue growth that’s actually a little bit lower than both MA and V right now.
I think PayPal has a decent chance of becoming a core part of global banking, and it is partway there already with an established user base and a very large market cap relative to most of its fintech peers (at $125 billion it’s much smaller than MA ($240 billion) or V ($360b), bigger than American Express ($90b) and far bigger than Square ($30b)).
There is risk, though, to substantial parts of PayPal’s business — the traditional payment processors like First Data/Fiserv are merging and becoming stronger to cut costs, and other payment companies like Euronet (EEFT) are also pushing for rapid growth and getting into remittances even as pretty much everyone is trying to push into direct lending and similar business services. And, of course, eBay and Amazon don’t need PayPal, and companies like Square and Shopify are trying hard to take those coveted processing fee dollars away from them, so a lot of the next ten years will depend on whether PayPal can keep its first wave of retail customers and partners happy or will have to compete hard to keep them as the next generation of fintech companies fights for market share.
And what would that 800% gain be if Lichtenfeld is right? Well, that would have to be a call option speculation — certainly PayPal is not going to rise 8X in value and become a trillion-dollar company this year (maybe someday, never say never, but not this year — I’d bet it would take a long while to get there if they continue growing revenue and income at something like 15% a year as expected), but if you time a call option speculation right you can certainly make 800% on that — the downside, of course, is that if you time it wrong, and most of us do most of the time, you lose 100% (the consistent money is in selling options, not buying them, but that’s not nearly as exciting and fun and it doesn’t create windfall profits).
There are a few call options that are pretty liquid, with large open interest, so if Lichtenfeld is recommending an options trade it’s likely to be one that now has an unusually large open interest (“open interest” is just the current number of contracts that exist for that option — that particular strike price and expiration date, and any newsletter with more than a few hundred subscribers would have a big impact on the open interest of almost any individual stock call option).
I don’t know which one, of course, but the fact that he’s promising 800% gains within a year indicates that we should be thinking longer term, and not just on this next quarter’s results or an instant dividend announcement “pop” — so I’d guess that he’s suggesting something further out.
There is a lot of open interest in June calls between $95-120, for example, though that doesn’t give a lot of time and there isn’t a lot of current volume… so I’d guess that perhaps we’re looking at October or January. The January 2020 calls at $110 have some decent volume today and a large open interest, for example, but I won’t go further into that because there’s no real way for me to guess which particular contract he might like.
Higher strike prices give you more leverage, of course, and a higher likelihood of losing all your money, and buying more time to expiration will cost you more money — the $110 calls for January, for example, are fairly expensive at $9.10, which means PYPL shares would have to go from the current $105 to about $190 for you to get an 800% return… but the $125s at that same January expiration date are just under $4, so you’d only need PYPL to get to about $160 for an 800% return.
If you’re not familiar with call options, they give you the option (not the obligation) to buy a stock at a set price (the strike price) any time before the expiration date. If the stock rises, that option may become “in the money” (trade above the strike price) and can become far more valuable, if the stock falls then the option to pay a higher price quickly drops in value… if the stock is below the strike price at expiration, the option would expire worthless. Put options are just the same thing in reverse, they give the option to sell (“put the stock” to some one else at the strike price), not to buy. Standard options are always for 100 shares, but are quoted at the single-share price, so one contract for those January PYPL $110 calls would cost you $910 plus commissions, and give you the right to buy 100 shares at $110 each anytime before January 17th of next year.
Most speculators on options lose money on the majority of their trades, myself included, but the huge 1,000%+ gains that you sometimes get when you’re right give a good adrenaline rush and keep people coming back — just know the risks going in, the risk of losing 100% on a stock in a few weeks is quite low, absent a shock bankruptcy or something, but the risk of losing 100% on an option speculation is very high.
In case you’re curious, it’s also unusual for options speculators to actually exercise their options — they certainly can, and sometimes they do, but they usually just sell them back to close out the contract and take their profits or losses… you don’t have to want to actually own 1,000 shares of PayPal to buy 10 call options on the stock, traders often use options as just short-term directional bets and never trade the underlying stock at all.
I’ve been keeping half an eye on PayPal for a while, I do like the company and admire its ability to build such a large network of buyers and sellers over the past 20 years, and after the big run the stock has had to start the year I of course regret not buying the stock while it was “napping” during 2018… but I have trouble choking down this valuation at the moment. Maybe I’ll talk myself into it in the future, and maybe PayPal will indeed announce a dividend initiation this year and cheer investors a bit, but I’ll stay on the fence for now.
It’s not my thinking that matters, though, it’s yours — it is, after all, your money. Ready to make a big bet on PayPal? Think they’ll announce a dividend in their quarterly conference call in a couple weeks and get everyone all hot and bothered? Thinking about betting on the stock with a risky options wager, or just buying the boring old equity? let us know with a comment below.
P.S. We’ve heard nothing about Lichtenfeld’s Stock Sequence Trader so far, so if you’ve ever subscribed please do click here to share your experience with your fellow investors. Thanks!
Disclosure: I own shares of Amazon and Shopify among the stocks mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.
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