Motley Fool Money: Episode Summary - "2024 in Review: Financials"

Release Date: December 14, 2024
Host(s): Dylan Lewis, Ricky Mulvey, and Mary Long
Guests: Matt Frankel, Motley Fool Contributor

Introduction

In the December 14, 2024 episode of Motley Fool Money, hosts Mary Long and Ricky Mulvey are joined by Matt Frankel to delve into the significant financial sector developments of the year. This comprehensive review covers the robust performance of financial stocks, strategic shifts within major companies like PayPal, the tumultuous journey of Boston Omaha, advancements in payment processing firms Shift4 and Toast, and the broader implications of corporate tax policies on the banking industry.

1. Stellar Performance of Financial Stocks in 2024

Matt Frankel kicks off the discussion by highlighting the impressive year-to-date gains in the financial sector. He notes, “The S&P is up 30% year to date” (00:02), emphasizing that even banks previously seen as underperformers have surged:

• Bank of America: Up 40%
• JP Morgan Chase: Up 47%
• Goldman Sachs: Up 57%

Frankel attributes this success to resilient consumer behavior and favorable economic conditions. He states, “Consumers are being resilient... they’re still paying their bills and spending money” (01:17), countering earlier fears of a recession sparked by rising default rates post-COVID.

2. Resilient Consumer Behavior

A key factor driving the robust performance of financial stocks is the unexpected resilience of consumers. Despite concerns over inflation and economic pressures, consumers have maintained their spending and debt obligations. Frankel elaborates, “JP Morgan Chase credit card spending is up 7% year over year” (01:17), highlighting sustained consumer confidence and spending habits.

3. PayPal's Transformation Under New Leadership

The episode shifts focus to PayPal, now under the leadership of CEO Alex Chris, who took the helm in late September of the previous year. Matt Frankel discusses the strategic initiatives implemented by Chris and his new executive team:

• Efficiency Improvements: "PayPal's revenue is up about 6%. We saw his earnings per share, up 22%, which indicates efficiency is working" (05:42).
• Aggressive Stock Buybacks: Committing to buy back $5 to $6 billion of stock annually.
• Major Advertising Campaign: Launching their biggest ad campaign featuring Will Ferrell in September (05:42).
• Product Innovations: Introduction of the PayPal Everywhere product, a 5% cashback debit card, and the Fast Lane Checkout system, enhancing partnerships with competitors like Adyen and Fiserv.

Frankel also touches on the future prospects, noting that while current revenue growth is modest, the new initiatives may drive significant growth in 2025 (05:42). He expresses cautious optimism, stating, “You need to start building out... increasing payment volumes, increasing the account, the user base at a faster rate” (09:05).

4. Boston Omaha's Challenging Year

Shifting to Boston Omaha, the conversation highlights a challenging 2024 marked by leadership changes and strategic setbacks. Matt Frankel provides an in-depth analysis:

• Leadership Exit: The abrupt departure of one of the co-CEOs, previously touted as Warren Buffett’s relative, undermines investor confidence: “No more Buffett comparison... I could just buy Sky Harbor” (10:45).
• Asset Management Division: Struggles led to winding down operations, leaving only minimal revenue streams from built-for-rent housing and broadband infrastructure.
• Current Revenue Streams: Slight growth in billboard and broadband revenues, but the most promising segment remains their stake in Sky Harbor, which constitutes about a third of their market cap (12:00).
• Surety Insurance Growth: The only segment showing significant growth, with revenue up 67% year-over-year in Q3 and maintaining a strong 13% net margin (13:54).

Frankel remains skeptical about Boston Omaha’s future, questioning the scalability of their surety insurance business and expressing diminished excitement compared to prior investments (13:54).

5. Payment Processors: Shift4 and Toast

The discussion then turns to the dynamic landscape of payment processors, focusing on Shift4 and Toast.

Shift4

Matt Frankel praises Shift4 for its remarkable growth and strategic focus:

• Revenue Growth: Achieving a 50% annualized growth rate over the past three years.
• Profitability: Unlike many high-growth firms, Shift4 maintains profitability.
• Specialized Verticals: Emphasis on sports, hotels, non-profits, and other niche markets ensures diversified revenue streams.
• Leadership Transition: Despite founder Jared Isaacman stepping down to lead NASA, Frankel remains confident in Shift4’s trajectory, likening it to a scenario where “if Elon Musk had to step down from Tesla, it would still be a great business” (18:01).

Toast

Conversely, Toast has experienced a transformative year:

• Earnings Performance: “They completely knocked it out of the park in the third quarter” (19:04), with revenue growth at 28% year-over-year.
• Profitability Milestone: Transitioning to profitability, though not yet to Shift4’s level.
• Product Expansion: Launching branded mobile apps for restaurants, enhancing their all-in-one service offerings.
• Market Penetration: Continued rapid expansion, adding thousands of new locations each quarter.

Frankel attributes Toast’s improved sentiment to solid Q3 performance and strategic product enhancements, forecasting an exciting outlook for 2025 (19:04).

6. Other Financial Storylines: Block and SoFi

Beyond Shift4 and Toast, Matt Frankel highlights other significant players:

• Block (formerly Square): Successfully refocusing on core businesses like Cash App and Square, shedding non-core acquisitions such as Title and Afterpay (20:34).
• SoFi: Surprising the market with a doubling in stock value over the past six months, maintaining momentum alongside strong banking performance.

Frankel also underscores the importance of monitoring corporate tax policies, which are poised to favor the banking sector through potential tax cuts, thereby enhancing profitability ("...lower corporate taxes... helps the banking industry" (20:34)).

7. Impact of Corporate Taxes on Banking

The episode concludes with a discussion on the anticipated changes in corporate tax policies. Matt Frankel posits that reductions in corporate taxes over the next four years could disproportionately benefit banks, which are among the most heavily taxed industries. This potential tax relief is expected to drive continued strong performance in the banking sector, reminiscent of the surge seen in 2017 when favorable tax conditions significantly boosted bank stocks (20:34).

Conclusion

The 2024 financial landscape, as reviewed in Motley Fool Money, showcases a resilient and dynamically evolving sector. Financial stocks have rebounded impressively, driven by strong consumer behavior and strategic initiatives from key players like PayPal. While companies like Boston Omaha face significant challenges, the growth trajectories of payment processors Shift4 and Toast, along with the focused strategies of Block and SoFi, highlight the sector's potential. Additionally, forthcoming corporate tax policies may further bolster the banking industry, setting the stage for continued growth in 2025.

Notable Quotes:

• Matt Frankel: “Consumers are being resilient... they’re still paying their bills and spending money.” (01:17)
• Matt Frankel: “You need to start building out... increasing payment volumes, increasing the account, the user base at a faster rate.” (09:05)
• Matt Frankel: “They completely knocked it out of the park in the third quarter.” (19:04)
• Matt Frankel: “Lower corporate taxes... helps the banking industry.” (20:34)

This episode serves as a valuable resource for investors seeking to understand the key financial trends and company-specific developments that defined 2024, providing insights crucial for informed investment decisions in the coming year.