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How to Call Jamie Dimon's Bluff on Fintech

Acts Chapter 20 verse 24 states, "However, I consider my life worth nothing to me, my only aim is to finish the race and complete the task the Lord Jesus has given me - the task of testifying to the good news of God's grace."


It may sound awkward to "consider my life worth nothing to me", but the truth is as a Christian, life's meaning is completely lost without God. God as the creator has gifted humanity with ingenuity, innovation, creativity, as well as talents and attributes for our use and benefit. But the second I eliminate God out of the equation, I am doomed to struggle and fail from my imperfections and inadequacies. The one task from God for me is to proclaim the gospel, as God's grace and power is greater than anything else.


The topic of good news during an increasingly difficult market is not a popular approach for investors to be receptive with. However, despite the volatility and distorted reality of markets and uncertainty of where they are going, there is always opportunity. More importantly, with Jesus, there is always hope for any aspect of one's life being loved and saved.


Topic

JPMorgan Chase & Co. (JPM) is no stranger to lost decades. In fact, two out of the past four decades have been "lost" for the company's shareholders. Below are approximations based on the data.

  • Less than 4% annualized return from mid-1982 to 1990

  • 18% annualized return from 1990 to 2000

  • (1.5%) annualized return from 2000 to 2010

  • 12% annualized return from 2010 to 2020

  • (2%) annualized return from 2020 to date

  • 8.5% annualized return from late-2005 to date (Jamie Dimon's tenure)

With close to 20 years under his belt, one could look at Mr. Dimon's performance in multiple ways.

  • It's fairly higher than the pre-Dimon era (23-year period) of 7% annualized

  • It's worse than the comparable 16-plus year period beginning in 1982

  • And arguably, the majority of positive performance was driven during the Trump Administration, with the current Administration's wipeout of the economy that is afoot stemming from overregulation and restrictions on the economy.

But enough with the tidbits. The topic of interest as always, is about tomorrow's market takers versus today's legacy incumbents. With Mr. Dimon's quote yesterday, "Brace yourselves for an economic hurricane" there are two important things to consider. First, it would appear that JPM may be headed for one of those lost decades. Second, and more importantly, Mr. Dimon has been extremely critical of Fintech, and I think investors need to continue to focus on what matters - key trends. Doing so will afford the opportunity to call Mr. Dimons bluff.


Key Takeaways


Yesterday's comment by Mr. Dimon and the Wallstreet Journal's tag-team report titled "'Buy now, pay later' companies impacted by late payments, losses" is no coincidence. BNPL is at the forefront of a divergent discussion as to the health of the business model during hard times with analysts on both sides of the fence (shocking!). There are two key Fintech areas that Mr. Dimon fears, the ascension of Cryptocurrency and BNPL's impacts on credit and debit programs.


This stance of course has little to do with the health of consumers and/or the relationships of consumers and merchants, but it is purely based on a philosophical and selfish perspective on maintaining the centralized status quo. The saying "if you can't beat 'em, joint 'em" is the key as Mr. Dimon would gladly gobble up Fintechs at a highly suppressed discount. The problem, leading Fintech companies know that what they have is far more valuable over time, and based on this, will continue to compete.


The key takeaway here for for investors is to pay strict attention to the data out there that allows the ability to see shifting trends across legacy and Fintech peers. When it comes to credit and debit programs, Mastercard Incorporated (MA) and Visa, Inc. (V) are the main players to establish a baseline upon based on their gross volume infrastructure networks.

The chart above includes MA's U.S. credit and debit programs, namely GDV, Purchase Volume, and Purchase Transactions. For MA, GDV stood at $2.4 trillion as of 2021 with Purchase Volume at nearly 90% of GDV, and Purchase Transactions at 35 billion. The key trend to understand here is the pre-pandemic performance versus the current inflated performance in 2021. It is very similar to the performance coming out of the recession in during 2009/2010. There has remained a stronger growth trend in Purchase Transactions, with a lower annualized growth rate towards 10% for GDV and Purchase Volume. This is due to the higher debit program proportion for transactions with a lower average transaction value over time and indicative of a higher non-U.S. presence.

For V's U.S. results, Total Volume, or GDV stood at $5.6 trillion as of 2021 with Payments Volume or Purchase Volume, at 88% of Total Volume, and Payments Transactions or Purchase Transactions, at 82 billion. V's trends are similar to MA with a clear accelerated performance during the pandemic-impacted results, and a more tight relative performance across all metrics as V's average Payment Transaction values have remained more steady versus MA due in large part to higher U.S. exposure.


The focus here is strictly within the U.S. as I would like to compare performance against Affirm Holdings, Inc. (AFRM) as the BNPL leader, but will also look at PayPal Holdings, Inc. (PYPL) to illustrate how even older Fintech models are poised to outperform legacy peers like MA and V. Coinbase Global, Inc. (COIN) is the clear U.S. Crypto platform leader, and is poised like AFRM, for long-term substantial growth. Despite volatility, in a short period of time COIN has achieved $1.6 trillion in trading volume. The bottom line is that MA and V combined, generated U.S. GDV at around $8 trillion in 2021. This is the market opportunity that investors should be paying attention to when it comes to Fintech opportunities and relative performance.



AFRM's GMV is the critical component to compare against GDV for entities like MA and V. AFRM GMV has grown near 80% the past couple of years with further acceleration expected for the current FY north of 85%. Critics can easily contend that this is simply too short of a comparative duration, and much lower baseline, but the fact is AFRM is growing substantially, notably via exclusive agreements and partnerships with Shopify, Inc. (SHOP) and Amazon, Inc. (AMZN). Active Customers and Transactions per Active Customer are also important to monitor as the company scales.


The real debate is based on the company's ability to grow during more difficult economic times and uncertainty. What we do know is that AFRM has performed much stronger than MA and V from 2019 to date. What we also know is that during hard economic times, expectations for MA and V are for decelerated performance as well with recent cycles from the pandemic and recession during 2007-2009 being recent examples.


This reemphasizes the important trend to monitor - relative performance. I'm bullish on AFRM and I believe that the company will continue to outperform MA and V regardless of the economic cycle. This is primarily attributed to the aforementioned agreements and partnerships, but is also associated with a stronger overall product for consumers during difficult times, with the potential to capture both weaker and stronger consumer GDV over time.


We are already seeing a slow-down in e-commerce spend, with the key focal point coming from AMZN's substantially weak performance during Q1 2022. Much stronger e-commerce plays have still witnessed exponentially higher growth rates while legacy peers witness marginal to negative performance. This type of scenario is what investors should be looking for as the economy slows down and possibly falls into a broad-based recession.

Combined, both AMZNN and SHOP GMV is at nearly $480 billion as of the LTM for Q1 2022 within the U.S. AFRM's GMV represented just below 3% of this total for their most recent quarter. As of 2021, AMZN and SHOP alone combined for approximately 53% of the $900 billion total. With mid-term expectations still poised to see e-commerce penetrate further towards the $1.5 trillion level, this is a massive runway opportunity for AFRM.

While AMZN and SHOP are two very important exclusive deals that AFRM has working, the company is represented across many other merchants including Walmart, Inc. (WMT) (third highest GMV behind AMZN and SHOP in the U.S.), Target Corporation (TGT), among many others, including an initial partnership with Apple, Inc. (AAPL) in Canada. With this type of exposure, AFRM is in the driver seat to market its services regardless of market cycle, and as a result, should see outpacing gains during varying market cycles for the foreseeable future. Investors measuring AFRM's performance independent of legacy peers will likely miss investment opportunities.

PYPL is a great example of an older Fintech approach that has developed a substantial digital payment presence. Payment Transactions and TPV have grown tremendously. PYPL has grown to $1.2 trillion in TPV and just over 19 billion Payment Transactions. Compared with MA and V, TPV stood at $6 and $10 billion respectively, and yet, PYPL is poised to overtake both companies on a Net Revenue basis, albeit with lesser Cash Flow margins. A key distinction is that PYPL can be utilized via a bank account and/or credit card account, so PYPL is in effect is still connected to MA and V.


Like PYPL, AFRM isn't necessarily eliminating credit or debit cards altogether. Rather the company is leap-frogging them, figuratively and literally to get front-end branding with consumers and merchants. It isn't about the infrastructure as much as it is about the products and services through a platform bridging consumers and merchants much more efficiently. MA and V may continue to maintain higher Cash Flow margins with slower volume growth. But for investors, a company like AFRM is a tremendous opportunity as the company scales exponentially faster by volume with Cash Flow margins likely in the 20-30% level, similar to PYPL.

The last point I'll emphasize is that AFRM's exclusive agreements and partnerships should not be taken lightly. AMZN and SHOP have witnessed exponential increasing penetration as a percent of MA and V GDV within the U.S. The original agreement with SHOP was just extended over a new multi-year term as both companies are seeing the benefits. Whether AFRM can sustain a longer-term exclusive deal with AMZN remains to be seen, but prospects remain promising.


Why it Matters


Mr. Dimon is bluffing hard when he questions Fintech. Five to 10 years from 2022 investors will look back as they always do and ponder what could have been. Mr. Dimon knows better, the problem is that he doesn't have the human capital to compete so he continues to rely on the imbedded centralized leviathan of the financial sector as a status quo approach.


I really feel that this is an important topic for investors. During market volatility and recessions, there are tremendous opportunities if there is a willingness to pay attention to broader trends and industry peer performance. During these times, there are always outliers that clearly illustrate stronger performance and increasing investment potential. Think AMZN's Revenue growth and Cash Flow performance during the recession during 2001-2002.


The hard part is everyone wants it to be even easier and a sure thing, which is never the case. Fintech companies like AFRM and COIN are at younger stages in their business cycles, and they are facing varying stages of market dynamics at play. But they are poised to compete and win against legacy peers, just as other innovative companies have done in the past. For AFRM, tracking GMV against AMZN and SHOP, and MA and V GDV is a sure way to gauge the company's health and trajectory, and ultimately, investment potential.



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