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2024 in Review: Financials
00:22:48
It’s been a banner year for banks. Even the worst performer among the big players is still up 40% year-to-date.
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Transcript38 lines
- [00:02]
Matt Frankel
Companies are more willing to take on debt when the economy's strong and interest rates are going down. So you're seeing a lot of debt underwriting revenue. Goldman Sachs debt underwriting revenue was up 46%. So you're seeing a lot of positive tailwinds. And if the Fed keeps cutting rates, that could get even better.
- [00:25]
Mary Long
I'm Mary Long, and that's Motley fool contributor Matt Frankel. As the year comes to a close, we're rounding up a number of analysts to look back on key industries and storylines from 2024. This week, Matt joins Ricky Mulvey to take a look at some of the big stories coming out of the financial sector. They also discuss PayPal's new narrative, questions for the CEO of a company once likened to Berkshire Hathaway, and why Wall Street's warmed up.
- [01:10]
Ricky Mulvey
So, Matt, as we look back on the year that was, what are your top financial headlines for 2024?
- [01:17]
Matt Frankel
Well, obviously, number one is that financial stocks have done really, really well. It doesn't seem like the banking, you know, crisis of mid 2023 was that long ago, but I mean, just look at some of these numbers. The S p is up 30% year to date. The worst performing bank stock on my radar is bank of America, and that's up 40%. JP Morgan Chase is up 47. Goldman Sachs is up 57% just year to date. And there are some good reasons for that. And this is really what stood out to me. One, the consumer has been a lot more resilient than a lot of experts had thought. If you remember about a year ago when default started spiking after the post Covid, like, you know, loan postponements and stuff like that, we started seeing consumer default spike. There was a worry that, you know, we were going to go into a recession, people weren't going to be able to pay their bills, et cetera, et cetera. That didn't end up happening in just one example, bank of America. The default, the net charge off rate has been, you know, flat for the past three quarters in a row. They're still adding checking accounts, they're still adding credit cards. JP Morgan Chase credit card spending is up 7% year over year. Consumers are being resilient. I mean, you hear there's a lot of inflation. You hear consumers are being squeezed, but they're still paying their bills and spending money. And that's really been a big standout on the consumer banking side.
- [02:35]
Ricky Mulvey
Yeah, Goldman Sachs, bank of America and Morgan Stanley all up about half. If, if not more for, for this Year. When I see that, I see lower interest rates, I see more trading volume. You see that on the retail and on the, the institutional side. And you're starting to see some green shoots in the IPO market as companies go public again after that deep freeze of 2022, early 2023. Are these just what's, what's standing out here for that big bank performance? Is this a lot of things they're doing themselves or is this tailwinds happening to these companies?
- [03:07]
Matt Frankel
Well, one, to be fair, you're, you're coming from a very low bar. There was essentially no one going public in 2023, for example, so investment banks weren't getting that revenue. But I don't want to really discount it because I mean, Goldman Sachs investment banking you mentioned up 20% year over year. JP Morgan investment banking revenue was up 29% year over year. I mean, you're starting to see not, it's not just IPOs and things like that. You're seeing a lot of debt underwriting. You mentioned lower interest rates. Companies are more willing to take on debt when the economy's strong and interest rates are going down. So you're seeing a lot of debt underwriting revenue. Goldman Sachs debt underwriting revenue was up 46% percent. So you're seeing a lot of positive tailwinds. And if the Fed keeps cutting rates, that could get even better.
- [03:54]
Ricky Mulvey
And a lot of these big banks are cyclical ish businesses. You see some exponential growth looking at these big banks that are, that are mature. We're talking growth numbers for banks that in some cases are older than 100 years. Does this say anything to you about where we are in the business cycle? Is this information important for individual investors?
- [04:12]
Matt Frankel
Well, I, I've said the words normal business cycle and normal recession so many times in my 25 year investment career that I have no clue what a normal recession is. I don't know what a normal cycle is. It's really hard to time these things. You can't really say we're at the peak of a cycle or the, you know, I thought we were at the peak of a cycle in 2014 and the market ended up, you know, tripling from there. So keep, take this with a grain of salt. But I do think it says that we are expecting things to be really, really strong for the next year or two. That's being priced into bank stocks. You're pricing in, you know, further interest rate cuts. You're pricing in a stronger economy. You're pricing in very, very good IPO activity and Just really good conditions. So I, I do think it says we're, the market thinks we're toward the top of the business cycle.
- [05:01]
Ricky Mulvey
Let's look at some payment processors and one that I care deeply about because it is a, it's a stock where I have my highest cost basis. If, if you want that for your conviction notes. There is PayPal and this was the first full year under new CEO Alex Chris. He came in, he was hired in late September of last year, but 2024 was really the year that he got sort of his feet under him. And you're able to implement some things when, when you're in the job for, for a couple of months. He promised a more focused PayPal. We're not going to do these silly acquisitions and we're really going to focus on helping merchants sell more things to you, the consumer. When you look back on his first full year at PayPal, what are some of the highlights you've seen from year one?
- [05:43]
Matt Frankel
Well, he's been busy and it's worth noting it's not just him. Alex Chris isn't the only new one. PayPal's entire C Suite is new. He's the, he's the longest tenured person in their senior leader leadership team at this point. So a lot of new hires. He's been busy. He's, his focus has been kind of twofold on efficiency and on increasing engagement. On efficiency. We saw PayPal's revenue, you know, it's only up about 6%. We saw his earnings per share, up 22%, which indicates efficiency is working. You're seeing them, you know, really allocate capital in shareholder friendly ways. Very aggressive stock buybacks. They're buying back 5 to 6 billion dollars of stock on an annual basis. And a lot of really interesting developments. I'm not sure if you're aware even, but PayPal went on its biggest ad campaign ever, ever, in September. I don't know if you saw the Will Ferrell ads with PayPal, but they rolled out their PayPal Everywhere product, which is essentially the best cash back debit card that I know of anywhere in the market. It's, you know, 5% cash back debit card, not a credit card that can just be used with your PayPal account wherever you go. The fast lane checkout has gotten a lot of headlines. And more important than the product itself is who they're partnering with. They got partnerships with people who are thought of as their competitors, like adyen and Fiserv. PayPal is going to be an option for Shopify, Checkout in the US previously, that was just in France. They're rolling out a lot of new features, like the ability to pull money between different PayPal accounts. Like, let's say you're traveling with a group of friends, you'll be able to pool it kind of in a separate, separate basket. It's really interesting features and a lot of what they've been doing and building out the ad platform, which I almost forgot to mention, you know, advertising is a natural fit for a company that has, you know, spending data on 400 million people. They hired the former former general manager of Uber's advertising business to lead it. And everything I just mentioned is not reflected in PayPal's numbers yet. So that's one thing to keep in mind as an investor. They've been busy, but the numbers still show kind of flat revenue, flat account growth, things like that. So 2025 could be an exciting year for them.
- [07:56]
Ricky Mulvey
Yeah, I've, I've certainly noticed more PayPal checkouts in, in online shopping and the advertising business. Makes sense. You think about it, not just sending it to outside parties, but for businesses that use PayPal, hey, we can have a more differentiated solution for you because we can see where people are abandoning their carts and maybe what kind of discounts things you can offer them in order to get them to, to stick around. In Chris's first year, he has, he's turned earnings around and that's some of that I think has been one time because you're, he cut people from the company. You're doing some disciplined things that you can't really rinse and repeat. But you know, when you look at the multiples on this thing, and I'm, I'm trying to be a long term buy and hold investor here because I see this as a critical infrastructure business and I'm looking for two things. One is the narrative. Can he change the narrative? And then number two is can he change the business? So what do you think could happen where PayPal, excuse me, where Wall street sees PayPal is a growth story again, something where we're going for that like 40ish earnings multiple instead of that 20ish earnings multiple we have right now? Or am I focused on the wrong thing as a PayPal shareholder?
- [09:06]
Matt Frankel
Well, so far, like we met you mentioned, they, they got earnings per share growing again. You know, earnings growth was over 20% over the past year. The, the analysts think that that is just PayPal maximizing its existence, existing business. All those things I just mentioned that they're, they're doing over the past year need to really translate to growth for, for it to get back to a high multiple. You need to start seeing more accounts come on, on the platform. I mean they have over 430 million active accounts. They added less than a million over the past year. So it, things like that need to change. So you really need to start building out, not just maximizing the efficiency of the current business but really increasing payment volumes, increasing the account, the user base at a faster rate than we've seen. And that's, that will be the inflection point if all the things I mentioned.
- [09:53]
Ricky Mulvey
Start translating into growth and very well those things couldn't. Maybe people will go with other payments platforms. I could very well be wrong about this. This is certainly something I'm going to be watching in 2025.
- [10:04]
Matt Frankel
I'm a shareholder too.
- [10:05]
Ricky Mulvey
Yeah. Speaking of companies where you're a shareholder, I'm shoehorning this company in because I think it's one of the most interesting sort of dramatic stories of 2024 and that's Boston Omaha. Why are we doing it in a financials show? That's a billboard and broadband business. Talked about that a little bit maybe. But this also is an asset management business, which it kind of threw out the window.
- [10:28]
Matt Frankel
I was going to say it was an asset management business.
- [10:31]
Ricky Mulvey
Was an asset management business. It's still, I think it still hasn't, it still has insurance there. So we got some financials there. You follow this company very closely. This is a very difficult company to follow. What is your 2024 recap for Boston Omaha?
- [10:46]
Matt Frankel
Well, talk about very difficult company to follow. You said PayPal is your biggest investment by cost basis. Boston Omaha is mine. So it's been a difficult 2024. It looks like they're finally turning it around a little bit. The biggest news was that one of their co CEOs abruptly exited the business. He was one of the biggest parts of the thesis for a lot of people. He was. You probably heard the connection that you know, Warren Buffett's great or grand nephew or whatever was running it. Oh yeah, he's the one that left. So you know that part of the thesis was out. No more Buffett comparison. Which I would didn't really buy that in the beginning anyway.
- [11:22]
Ricky Mulvey
I'm pretty sure I'm like Genghis Khan's great, great, great, great nephew or something too. But yeah, please continue.
- [11:28]
Matt Frankel
Start a holding company and hype that up. So Boston Omaha, you mentioned the asset management business. They finally admitted that that wasn't working until, you know, earlier this Year they were, you know, trying to raise third party capital, essentially be like an early stage like Brookfield and, and raise third party capital to pursue built for rent housing, broadband infrastructure. A few opportunities they saw they had, they were able to get no traction on that. The asset management business existed for, for that reason they ended up winding. They're winding it down right now. They still have some of their, like the built build for rent fund still has I think $6 million or so, but they're, they're winding that down now. The business is kind of stagnant in a lot of ways. We'll get to insurance in a second because I know you want to talk about that, but I mean the billboard revenue is up 6% year over year. Broadband revenues up 5% year over year. The most, the most exciting part of the business now is the sky harbor investment. They, they took a company called sky harbor public by spac, still own a whole like I think 20 or so of it. And that makes up like a third of their market cap because it's been doing well. But if I want to own Sky Harbor, I'll just buy Sky Harbor. So you mentioned insurance and Boston Omaha, they write surety insurance. It's a very specific type of insurance. I went back when I used to manage other people's money as a financial planner. I used to have to have a surety bond. So that is the most, the best growing part of the business. Their revenue from charity Insurance was up 67% year over year in the third quarter. Everything else was like, you know, mid single digits. They have a 13% net margin from the insurance business, which is very, very strong. You know, a loss ratio of 17%. Most, most insurance companies run about 70. So it's a very profitable type of insurance, but it's small. And my question is, can it continue to scale? And I mean it. I, I'm, it's, I'm not as excited about the company as I once was. The, the asset management division to me was the number one reason to be excited. I'm not saying it's a bad business. Billboard. There's the economics are fantastic. Broadband, the economics are great, great. Like 80 gross margins, things like that. Surety insurance is a great business, but I'm not as excited as I was.
- [13:54]
Ricky Mulvey
Yeah. What. And to be clear, Adam Peterson, who's the now sole CEO of Boston Omaha, has an open invite to join us on Motley Fool Money to answer some questions from from us. Shareholders would love to see him on in 2025, but since he's not here. We're going to ask questions into the void. Matt, what, what questions would you like to see him answer? As a, as a shareholder of Boston Omaha?
- [14:20]
Matt Frankel
I mean, I'd really kind of just echo what I just said. Why should investors be excited at this point? I get, like, what you're doing. You're building, you know, the billboard business. Great economics. You know, great economics throughout this business. The most exciting part of the company is a third, a passive investment in sky harbor, which I could just buy on the open market. So now that asset management's gone, why should investors be excited to buy this stock? What. What's the market beating potential here?
- [14:48]
Ricky Mulvey
And this was also one. I hope they answer that question because recently this year, they also canceled the virtual version of their annual shareholders meeting. You could only go in person, which, to be frank, I took that as a. I took that as an unnecessary shot. It's smaller investors like me. I'm not going, you know, I'm not paying for a trip to Omaha to go hear from them. Put it on video. Let me see what the highlights are. I thought that was an unsavory move, even though I'm a shareholder.
- [15:16]
Matt Frankel
I agree. And, I mean, they were only in person last year, but they did it the same weekend as the Berkshire meeting, so people were there anyway, so do that. If you're going to do it in person, do it on a weekend when I'm already in Omaha. I don't want to make a separate trip just for that.
- [15:32]
Ricky Mulvey
All right, let's talk about some payment processors, as they have had a pretty significant year. Have you been. Have you been following shift 4 and or toast over the past year? Because those have had some pretty big years. These are companies. Shift four, which we'll get to in a sec. If you're at a stadium and you buy a beer, you're probably using a shift 4 terminal. And if you've ever been in a restaurant where a. A server has to ask you a couple of quick questions on an iPad at the end of a meal, then you've used Toast. Have you been following these over the past year?
- [16:02]
Matt Frankel
Yes. And that was a perfect description of both of these companies. Now, shift 4 is one of the more interesting stories in business in general. I know we talked before the show. Their founder, CEO, Jared Isaacman, left. He's going to be the leader of NASA, which I can't blame him for leaving. He founded Shift 4 in 1999 when he was 16 years old. 16. It's pretty impressive business. They're not only Growing really fast. I mean the revenue's grown at a 50 annualized rate for the past three years even at their current scale. You mentioned the sports vertical. That's been by far their most successful recent one. But they're also in, if you've, if you go to a hotel, you're probably going to use a shift four terminal. That was their, their big vertical before that. Really a lot of potential here and not, it's not only growing that fast, but it's a profitable business. I love that they specialize in vertical by vertical by vertical. You know, the sports vertical, the, the non profits vertical is another one that they're building right now. I, I think the business has a lot of traction and at this point, I mean I'm, Jared Eisenman did a great job of getting it to where it is, but at this point I'm not sure that, you know, the, his second in command who's been with him the whole time can't just can't continue this, this trend.
- [17:19]
Ricky Mulvey
Yeah. As an American, I'm, I'm happy to see Jared Isaacman go lead NASA. If you read his post on X, it'll get you fired up about space. Basically like we're gonna be a space faring civ civilization again and buckle up because I remember, you know, we're gonna get shuttles back on the moon, that kind of thing. I wish I could do a space show with him. Maybe, maybe he'd come back on. He's been on Motley Fool Money before. But now you just have the business of shift four without the charismatic leader. That was something that investors were willing to pay for was, you know, this rockstar CEO who was getting big growth and also going up in space planes. Now that you just have the business and maybe it's a wait and see kind of thing. Is the business of shift 4 still interesting to you as a, as an investor in the financial space?
- [18:01]
Matt Frankel
Yeah. And I mean in the same way that if, if Elon Musk had become the leader of NASA and had to step down from Tesla, that Tesla would still be a great business.
- [18:10]
Ricky Mulvey
It's not impossible. That happens.
- [18:12]
Matt Frankel
It's not. No. And, and the post you just read from, from X sounded like it could have been written by Elon Musk, honestly. So it's, it's. Yes, I think it's still a great business and I think they've scaled to the point and have the, the recipe in place to the point where, where someone who's been kind of working under Isaacman this whole time can can step in into the role.
- [18:35]
Ricky Mulvey
Also. So a big year for payment processors. I mentioned Toast a little bit earlier. This is also one I own more restaurants adopting them. You're seeing those growthy growth third double digit revenue numbers. They're starting to. They're cutting their losses. I think you meant you mentioned earlier Shift four makes a profit. Toast is kind of getting there. They're trying to but it's a growth story that investors are now willing to pay for over the past year. Why do you think sentiment has changed so much for. For the iPads asking you a couple of questions.
- [19:05]
Matt Frankel
Well in, in the past month or two. One, their earnings completely knocked it out of the park in the third quarter. I mean they beat on the bottom at the top and bottom line. Their guidance was fantastic. I mean they're growing revenue at 28% year over year and now they're profitable. I mean they're not as profitable as shift 4, but they're profitable. And really it's an, it's a business story like a pro business environment's gonna you know pro business administration is going to be in the White House next year. People are expecting, you know, corporate tax cuts. They're expecting, you know people to be more excited about spending money and, and you know, just a stronger than expected economy is kind of what the, the expectation has shifted to. And that's why the market as a whole has really lifted over the past month or month and a half. And you know Toast is really doing a great job of being like the all in one. I mean branded mobile apps for restaurants is something they just recently rolled out. It's not just the little payment terminals which I wish they would get a little more honest about. It's going to ask you a question and just ask for a tip. I just say leave me a tip here. But they're doing a great job. They're everywhere. They continue and somehow they continue to add thousands of new locations every quarter. So it's just a really impressive growth story and they completely knocked it out of the park this year.
- [20:26]
Ricky Mulvey
Are there any other financial stories that we didn't hit that investors should have paid more attention to in 2024?
- [20:34]
Matt Frankel
I, I think Block is a big one. Block really got it back on track this year. They, they were kind of kind of like how PayPal where they were just start. You're trying to acquire everybody and try to know really disjointed. I remember Jack Dorsey led his. I think it was the first quarter but don't quote me on that. I think he led. He led one of his shareholder letters with we've been quiet because we've been been focused. And that's really show. They're really just doubling down on the core businesses. They're not. You remember they, they acquired Title a couple years ago. They acquired Afterpay. Now they're really just focusing on the Cash app and Square. So they're doing a great job of that. And Sofi has really surprised me and a lot of people. They've doubled in the past, like six months. The stock has. The banks really kept momentum going. And all banks should pay attention to what's going on politically in 2025, regardless of where you stand on the political spectrum, the reality is there's a high probability that we'll see lower corporate taxes in the next four years than we otherwise would have. So that's a debt disproportionately helps the banking industry because banks are one of the most heavily taxed industries. When you look at tax as a percent of net income. And this is what happened in 2017, that's why they were such good performers and it's something to keep an eye on as we go into 2025.
- [21:52]
Ricky Mulvey
So I think you answered the final question of other storylines to watch in addition to what storylines investors should pay attention to. Matt Frankel, appreciate you being here. Thank you for your time and your insight on Motley Fool Money.
- [22:03]
Matt Frankel
Always a pleasure.
- [22:14]
Mary Long
As always. People on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertising. The Motley fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening.
- [22:36]
Ricky Mulvey
We'll see you tomorrow.