Amazon aims to put Amazon Pay in stores

Amazon aims to put Amazon Pay in stores

While we’ve witnessed the digital wallet explode in Asia, thus far it remains a rather fragmented nascent market here in the US. We’ve seen efforts by Apple, Google, PayPal, and others, but so far here in the US adoption of mobile payments remains low compared to that in Asia. Yes, there are some successes, like the one enjoyed by Starbucks, but so far there is no “universal” mobile payment platform that has taken the country by storm.

This has prompted Amazon to make its move, leveraging consumer comfort with its online digital wallet and one-click payment capability to bring Amazon Pay to the mobile payments space. While Amazon may not be first or second in the mobile payments space, as we’ve seen time and again from Apple, being early with a new technology or disruptive platform doesn’t get a company across the gold medal. Rather, waiting for the inflection point in adoption and having a simple to use and intuitive solution tends to win the race. That could very well be what Amazon is doing as it looks to pick up another tailwind in our Digital Lifestyle investing theme.

 

Amazon.com Inc.  is gearing up to challenge Apple Inc. in the mobile-payments race.

The e-commerce giant is working to persuade brick-and-mortar merchants to accept its Amazon Pay digital wallet, according to people familiar with the matter, attempting to expand a service now used primarily for purchases online.

To start, the company is looking to work with gas stations, restaurants and other merchants that aren’t direct competitors, a person familiar with the matter said. Retailers that view Amazon as a threat could resist the effort, the people said.

The push to become a bigger player in consumer payments shows Amazon’s desire to further integrate itself into the lives of its customers. It isn’t clear exactly how customers would use Amazon Pay in stores: They could tap their phones at checkout, much the same way they use Apple Pay, or scan a code on their phones, among other options. Apple says Apple Pay was accepted at more than five million in-store locations in the U.S. as of May, and the number of merchants accepting its wallet is growing.

Currently, shoppers can use their Amazon accounts to check out at a small number of Amazon’s brick-and-mortar locations, such as Amazon Go and its bookstores, and a growing number of online merchants accept Amazon Pay, its third-party service. Amazon Pay stores credit- and debit-card numbers, allowing shoppers to skip the step of typing in their account information at checkout and making them more likely to complete purchases.

Currently, shoppers can use their Amazon accounts to check out at a small number of Amazon’s brick-and-mortar locations, such as Amazon Go and its bookstores, and a growing number of online merchants accept Amazon Pay, its third-party service. Amazon Pay stores credit- and debit-card numbers, allowing shoppers to skip the step of typing in their account information at checkout and making them more likely to complete purchases.

Amazon also is working to make Alexa, its virtual assistant, an in-store payments platform, people familiar with the matter said. For example, a customer paying for gas could tell the Alexa voice assistant in the car to use Amazon Pay.

Source: Amazon Pay Accepted Here? Web Giant Aims to Put Digital Wallet in Stores – WSJ

See, fundamentals do matter

See, fundamentals do matter

Welcome to this week’s edition of Tematica Investing. As you recall, this is the publication that replaces my old Growth & Dividend Report newsletter. Each week in Tematica Investing we’re going to provide you with investment ideas and strategies based upon our proprietary thematic investing framework, and takes a long-view approach to investing based upon documented trends that are uncovered while analyzing the intersection of economic, demographic, psychographic, regulatory and technological factors.

Now, in this week’s edition:

  • There are no new additions to the Tematica Select List today, however, we continue to examine new opportunities for it and the Tematica Contender List . . .read more.
  • As we expected, volatility is back on Wall Street as the herd once again begins to focus on fundamentals.
  • Looking at what’s up with the Tematica Select List as Physicians Realty Trust (DOC) makes a big transaction
  • We’re not taking it easy, we’re adding a new theme to the Tematica stable – The Fountain of Youth.
  • All that and more thematic confirmation ripped from the headlines

Click the link below to download the full report

downalod-pdf

Nike: Just Do It? Maybe not quite yet

Nike: Just Do It? Maybe not quite yet

Here we are again, another update to Tematica Investing, your weekly service that replaces the Growth & Dividend Report.

In this week’s edition, we tackle:

  • Expectations for GDP in the current quarter fell even further this week.
  • As expected Fed Chairwoman Janet Yellen pushes out potential rate hike timing
  • Dividend stocks come back into vogue as Yellen’s comments reverse hawkish comments last week and that’s good news for several of our holdings.
    Examining Nike ([stock_quote symbol=”NKE”]) and Under Armour ([stock_quote symbol=”UA”]) shares, but only one gets on the Tematica Contender List
  • More thematic confirmation ripped from the headlines…
  • Other securities mentioned in this report include: Alibaba (BABA), Apple (AAPL), AT&T (T) Dick’s Sporting Goods (DKS), Facebook (FB), Finish Line (FINL), Foot Locker (FL), General Mills (GIS), Lions Gate Entertainment (LGF), ParkerVision (PRKR), Physicians Realty Trust (DOC), Qualcomm (QCOM), Regal Entertainment Group (RGC), Shoe Carnival (SCVL) and Target (TGT).

Click the link below to download the full report

downalod-pdf

The Fed “Knows When to Hold’ em” as we build our contender list

The Fed “Knows When to Hold’ em” as we build our contender list

We know this may sound a bit like “the dog ate our homework” excuse as we are getting this week’s Tematica Investing out later than usual, but we wanted to address what the Fed had to say, or more like what they didn’t do.

That’s right, we dig into the outcome of the Fed’s March FOMC meeting that left interest unchanged, but led to a revision in expectations that means the Fed is increasingly less likely to boost interest rates in the coming months. In other words, as we’ve been saying for a while now, slower growth and currency headwinds will continue to restrain growth in the coming months. As such, we will continue to look for disruptive technologies, pain points and other tectonic shifts that fuel our thematic investing lens as well as smartly priced dividend payers that are also benefiting from our thematic tailwinds.

  • Also this week we add another two companies to the Tematica Contender List, both are a part of our Connected Society investing theme and stand to benefit form the increasing amount of time people are spending on Digital media. We also share the latest edition of Thematic Signals, otherwise known as Ripped from the Headlines confirmation of our investing themes unfolding around us in the world we live in.
  • While the Fed left interest rates unchanged coming out of its March FOMC meeting, it revised its GDP and inflation forecast for the US economy modestly lower vs. December expectations.
  • Regal Entertainment ([stock_quote symbol=”RGC”]) continues to benefit from a robust box office and indications point to more of the same ahead. We are reviewing our price target on RGC shares with an upward bias.
  • We are removing Philip Morris International ([stock_quote symbol=”PM”]) shares from the Tematica Select List and issuing a Sell rating at current levels
  • We are adding ComScore ([stock_quote symbol=”SCOR”]) and Nielsen NV ([stock_quote symbol=”NLSN”]) to the Tematica Contender List as part of our Connected Society investing theme given the continued shift in advertising spend to Digital platforms from TV, Radio and other legacy media.
  • More confirmation for our thematic investing lens is found in this week’s edition of Thematic Signals

downalod-pdf

Closing out a Cashless Consumption Position in PYPL

Closing out a Cashless Consumption Position in PYPL

Actions for this Week

The following are the changes in ratings or strategy we are making as of Friday February 26, 2016:

  • Following the sharp rebound in the stock market this week, and weakening economic and market fundamentals, we’re rating ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares as a “Buy”.
  • Following PayPal /American Express rumors, we’re updating our PayPal ([stock_quote symbol=”PYPL”]) rating to “Sell”.

During the last few weeks, the stock market, as measured by the S&P 500, has undergone a powerful rally. As of last night, that market had climbed 8.6% from its Feb. 11 close. While we are enjoying the market’s move higher, the economic data has continued to point to a slower domestic and global economy. Examples include the following:

  • China’s official Purchasing Managers’ Index fell to 49.0 in February, marking the lowest reading since November 2011.
  • The Caixin/Markit Manufacturing PMI February reading for China dropped to 48.0, contracting for the 12th straight month.
  • China’s services sector continued to expand in February, but at its slowest pace since late 2008.
  • Euro-zone factory activity expanded at its weakest pace during the last year in February, with its manufacturing PMI falling to 51.2 from 52.3 in January.
  • Japan’s February PMI hit at 50.1 in February, down from 52.3 in January.
  • While a tad better than last week’s Flash February reading of 51.0, the final February manufacturing PMI reading for the United States fell to 51.3 from 52.4 in January. This marked the slowest increase in 28 months.
  • The ISM manufacturing perked up to a reading of 49.5, from 48.2 in January, but February was the fifth consecutive month with a reading in contraction territory. We’d note the last time this happened was during the 2009 financial crisis.
  • The domestic services economy edged down in February per the Institute for Supply Management and even the Fed’s Beige Book reported a “marginally weaker tone” in February than January.
  • Total U.S. carload traffic for January and February fell 13.5% year over year, according to data from the Association of American Railroads.

Taking all those data points together, along with those from January, tells us that the velocity of the global manufacturing economy slowed further in February. Quarter to date, the global economy appears to be hitting another speed bump. My concern is the increased probability of a repeat of what happened coming into 2016 — slow or weakening economic data, currency headwinds and cuts to earnings expectations.

Turning back to the stock market… the recent and welcome market rally has pushed the NYSE McClellan Oscillator (an indicator of market breadth based on the number of advancing and declining issues on the NYSE) even higher than last week and back to levels from which we’ve seen the market correct significantly.

sc-NYOP

In addition, as of last night, the S&P Capital IQ Short-Range Oscillator shows the market is now significantly overbought — two times overbought to be precise.

Conditions warrant staying cautious near-term

What this tells me is we once again are back in cautious territory and that means that not only are the ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares a buy at current levels, but we need to be cautious when adding new positions in the short-term as well. Our current thematically driven and dividend-heavy portfolio has served us well in 2016, allowing us to easily outperform the market indices.

Given the increasing probability that growth and earnings expectations will need to be revised lower yet again, amid the current overbought nature of the market, my plan is to keep these more defensive positions in Aging of the Population play Physicians Realty Trust ([stock_quote symbol=”DOC”]), Connected Society play AT&T ([stock_quote symbol=”T”]), Guilty Pleasure investment Philip Morris International ([stock_quote symbol=”PM”]) and Content is King holding Regal Entertainment Group ([stock_quote symbol=”RGC”]) intact. Even American Capital Agency Corp. ([stock_quote symbol=”AGNC”]), with its monthly dividend stream and annual dividend yield at better than 13%, warrants holding as things are poised to once again get a little bumpy.

Here’s the thing — we’ll once again have a chance to buy thematically well-positioned companies at better prices and more compelling risk-to-reward trade-offs. Let’s not jump the gun, but rather be patient and prudent. As an experienced carpenter would say, “measure twice and cut once.”

Closing PYPL position post PayPal/American Express Rumors

The best performer over the last week has easily been PayPal ([stock_quote symbol=”PYPL”]) shares, which rose more than 5% to $38.80. That has our PYPL shares up 16.6% since mid-September vs. less than 1.7% for the S&P 500. Fueling the recent move in PYPL shares was a rumored tie-up between PayPal and charge and credit card company American Express ([stock_quote symbol=”AXP”]). However, Wall Street was very quick to shoot that rumor down. With takeout speculation abating and concerns over the direction of the market near-term, my thought is it’s better to take profits and look to buy PYPL shares back at better prices. Long-term, I continue to like the company’s position as a standalone play for our Cashless Consumption investing theme. Therefore, we are updating our rating on  Paypal to “Sell” at this time.

Thematic tailwinds continue to be a guiding light in the market storm

Thematic tailwinds continue to be a guiding light in the market storm

Actions for this Week

The following are the changes in ratings or strategy we are making as of Friday February 26, 2016:

  • Use the recent market strength to capture profits by selling half your position in  Philip Morris International (PM), AT&T (T) and PayPal (PYPL) shares.
  • On the remaining PM position, suggest setting a stop loss at $87 and raise the recommended stop loss on PYPL shares to $33 from $31.
  • Maintain “Hold” rating Tematica Select List positions AGNC, DOC, PM, RGC, SH and T.
It’s been another up and down week for the stock market, once again shaped by the moves in oil prices. These movements can cause short-term disruptions in stock prices as evidenced by the gyrations of the last few weeks, but our thematic tailwinds continue to be a guiding light in the market storm.

Over the last few weeks we’ve recommended investors continue to sit on the sidelines preferring to keep our powder dry amid the market turbulence as we wait for more favorable risk to reward profiles in stock prices. On the dividend side of our holdings — which continues to outperform— as of the market’s close last night, our position in Philip Morris International ([stock_quote symbol=”PM”]) is up more than 15% from my initial recommendation and both AT&T ([stock_quote symbol=”T”]) and PayPal ([stock_quote symbol=”PYPL”]) shares are up more than 10% including dividends.

While the stock market has rebounded, there are still reasons to remain cautious. . . 
WTIC Light Crude Spot Prices

WTIC Light Crude Spot Prices

The recent rally in the stock market has been due in part to organizations like the OECD and others that are calling for more monetary stimulus. Let’s remember, we have yet to feel the full impact of the oil price drop, but the evidence is mounting:

  • Comments from the CEO of Devon Energy ([stock_quote symbol=”DVN”]) imply most US shale producers need $55-$60 oil to work
  • We’re beginning to hear about more oil related layoffs as Halliburton cut another 5,000 jobs following up on cuts of 4,000 jobs in the December quarter.
  • Wells Fargo ([stock_quote symbol=”WFC”]) has set aside $1.2 billion for potential oil and gas sector loan losses as different forecasts suggest up to 35% of public oil companies could face bankruptcy.
  • A report from Deloitte found 175 such companies are facing “a combination of high leverage and low debt service coverage ratios.” Odds are more financial institutions that just Wells Fargo will be hit should Deloitte be correct.
Meanwhile, the economy in China is expected to have contracted even further in February

February would mark the seventh consecutive monthly decline in China’s manufacturing sector. Per a poll conducted by Reuters based on 23 economists, China’s official manufacturing Purchasing Managers’ Index (PMI) is expected to dip to 49.3 in February from 49.4 a month earlier. We’re already seen the ripple effect into the Eurozone, and that along with oil related loan losses helps explain why European Central Bank chief Mario Draghi is ready to do “whatever it takes” come March.

Taken all together, these data points lead us to conclude that there is likely another shoe to drop, and that shoe will not only weigh on the market, but it will probably lead to job destruction along the way. Keep in mind, the jobs created in the oil and energy sector have been some of the better paying ones created over the last few years, compared to the those in the retail, hospitality and other sectors that have led recent job growth

All of this is likely to keep the Fed’s hand off the interest rate button in next few weeks.

$NYMOT: NYSE McClellan Oscillator

$NYMOT: NYSE McClellan Oscillator

Finally, we also have to acknowledge that short covering has helped propel the market higher over the last few days even though the fundamentals (economic growth, earnings expectations) have not changed much in the last few days. That short covering has led the NYSE McClellan Oscillator (an indicator or market breadth based on the number of advancing and declining issues on the NYSE) to rebound sharply over the last few days, past levels from which we’ve seen pullbacks in the market.

So this short selling activity is yet another reason to remain cautious near-term in my view, which means we are maintaining our “Hold” rating on ProShares Short S&P 500 ETF ([stock_quote symbol=”SH”]) shares.

Trimming back our PM, T and PYPL positions, and checking some stop losses

Rather than dawdle, we recommend using the recent strength in the market to trim back positions in Philip Morris International ([stock_quote symbol=”PM”]), AT&T ([stock_quote symbol=”T”]) and PayPal ([stock_quote symbol=”PYPL”]) by selling half of each. This move will lock in double-digit gains, while leaving some skin in the game should the market climb higher in the near-term. We are also recommending at this time that investors set a stop loss for PM shares at $87 and raising the stop loss on PYPL shares to $33 from $31.

Over the last few weeks a number of thematically well positioned companies have had their share prices retreat to more attractive levels. Examples include Netflix ([stock_quote symbol=”NFLX”]), Amazon ([stock_quote symbol=”AMZN”]), and Skyworks Solutions ([stock_quote symbol=”SWKS”]) to name a few. Should another pullback in the market come to pass as I expect, we’ll be watching these and other thematic contenders closely.

What’s playing at the box office?

Year to date the movie box office is up 1.6% year over year due to strong performances from “Deadpool”, “The Revenant”, “Kung Fu Panda 3”, and of course “Star Wars: The Force Awakens”. In just under a month “Batman v Superman: Dawn of Justice” will drop and soon after that “Captain America: Civil War” will hit in early May. Other tent pole films from Disney and other film companies have 2016 looking like a better year for bodies in seats, and we all know that drives sales of those high margin snacks and beverages.

This points to additional upside for Regal Entertainment ([stock_quote symbol=”RGC”]) shares, which closed last night up more than 6% including dividends since our initial “Buy” rating in mid-January recommendation. The next sign post for the shares will be on March 8th when the management team gives it presentation at the Raymond James Institutional Investors Conference in Orlando, FL. For investors who have already made a move on RGC shares, we recommend you continue to hold them; for those that haven’t jumped in yet you could still do so lest they pass $20, at which point we do not recommend committing fresh capital. Our RGC price target remains $24.

Coming up, earnings from Physicians Realty Trust

On Monday, our Aging of the Population play, Physician Realty Trust ([stock_quote symbol=”DOC”]), reports its quarterly earnings. Consensus expectations for the quarter are sitting at earnings per share of $0.26 on revenue of $39.2, up 18% and more than 100% year over year, respectively.  Remember, Physicians Realty has been upsizing and using its balance sheet to grow its leased property footprint to doctors, hospitals and other healthcare delivery systems. In late January the company completed a secondary offering that garnered it net proceeds of more than $320 million, and the company should shed more light on its plans to put that capital to work and grow its footprint in 2016.

Exiting calls on PYPL, RGC, WFC, MBLY, FIT amid increased market uncertainty

Exiting calls on PYPL, RGC, WFC, MBLY, FIT amid increased market uncertainty

Actions from this post

Ratings changes included in this dated post

Issuing “Sell” ratings on the following positions:

  • PayPal (PYPL) January $35 calls (PYPL160115C00035000)
  • Regal Entertainment (RGC) January $20 calls (RGC160115C00020000)
  • Wells Fargo (WFC) February $60 calls (WFC160219C00060000)
  • Mobileye (MBLY) February $46 calls (MBLY160219C00046000)
  • Fitbit (FIT) February $30 calls (FIT160219C00030000).

To say the stock market has started the year on a rocky note is a bit of an understatement. Some might chalk things up to the leading cause, the lack of a Santa Claus rally at the end of 2015 and into 2016 (given the 2.3% drop in the S&P 500 from Christmas Eve through Jan. 5). But from my perspective, the market once again has been hit by what we would call a healthy dose of reality with more than a sprinkling of uncertainty.

The drivers behind the market move lower included a healthy dose of uncertainty following North Korea’s latest nuclear bomb test early in the week. Also, there were the latest go-rounds between Saudi Arabia and Iran that have more than likely extinguished any chance of these two major producers working together to cut production amid the growing oil supply glut, plus renewed concerns about the growth of the global economy. The net effect was a 6% drop in the S&P 500 for the week, marking the worst start of a new year since 1928.

Given the relationship between individual stocks and call options, the last week has resulted in even greater losses for our Tematica Select List. As you’ve probably seen, given the sharp move lower in our Fitbit ([stock_quote symbol=”FIT”]) and Mobileye ([stock_quote symbol=”MBLY”]) positions, as well as those for Disney ([stock_quote symbol=”DIS”]) and Amazon ([stock_quote symbol=”AMZN”]), it’s become a case of shoot first and ask questions later.

Digging into these and other moves, as well as looking under the hood of the market, leads me to think that, at best, the market will move sideways through the upcoming December-quarter earnings period. As I’ll explain in a minute, it’s more apt to head lower before stabilizing. Therefore, let’s look to minimize any additional losses by exiting your PayPal (PYPL) January $35 calls (PYPL160115C00035000), Regal Entertainment (RGC) January $20 calls (RGC160115C00020000), Wells Fargo (WFC) February $60 calls (WFC160219C00060000), Mobileye (MBLY) February $46 calls (MBLY160219C00046000), and the Fitbit (FIT) February $30 calls (FIT160219C00030000).

Following those trades, you should have no active trades left in your Tematica Select List other than the Disney (DIS) February $110 calls (DIS160219C00110000). While I aim to hold that position, be sure to set a protective stop at $0.40. I’m sure the idea of having no active positions has raised an eyebrow or two. However, given the fast drop in the market last week, I would look to use any near-term market strength to selectively add a few put trades or call options on inverse ETFs such as ProShares Short S&P 500 ([stock_quote symbol=”SH”]).

Why not today? Based on the latest reading for the S&P Capital IQ Short-Range Oscillator, the market is oversold. That reality means we could see a “dead cat” bounce on any modestly positive news.

As for why I think the market is poised to go lower before heading sustainably higher, the December PMI and other data published early last week from ISM and Markit Economics echoes what I’ve been seeing in the monthly truck tonnage (down 0.9% month over month in November) and monthly rail carload traffic (down 15.6% year over year in December) railcar loadings. Plus, we have a slowing domestic economy and continued contraction in the China economy. From my perspective, this led to a very unsurprising cut by Deutsche Bank in its gross domestic product (GDP) growth forecast for 4Q 2015 and 1Q 2016. The firm now has its GDP growth forecast for 4Q 2015 at 0.5% (down from 1.5%) and its revised take on GDP in the current quarter at 1.5%, down from 2%.

Candidly, I expect more to follow as recent data get digested. The World Bank recently cut its outlook for China’s growth in 2016 to 6.7%, from 7% in June, and expects Brazil’s economy to shrink 2.5% this year and Russia’s to contract 0.7%. Meanwhile, the World Bank has reduced its 2016 global growth forecast to 2.9% from 3.3% last June, which helps explain the demand side of the equation for falling commodity prices. I’m keeping tabs on these commodity prices, such as copper and steel, which could be a leading indicator for a pick-up in the global economy.

The growing amount of data I’ve been seeing over the last few months point to a mismatch between the slowing global economy and earnings expectations for the coming year. As I have shared previously, I do not see how the S&P 500 group of companies will jump-start earnings to match the current consensus expectation of 7.5% growth year over year in 2016 vs. 1.1% in 2015. As we head into the December-quarter earnings season, I expect to see the above confluence of factors result in more companies offering cautious outlooks for the coming year than prognosticating robust growth. There are plenty of reasons to tread carefully near term, along with potential downward earnings revisions for the S&P 500.

Exactly how low those earnings expectations will go remains to be seen, but what it means is we are likely in for more turbulent times as this resetting occurs. We’re already starting to see more of that as Goldman Sachs ([stock_quote symbol=”GS”]) lowered its 2016 earnings forecast for the S&P 500 to $117 per share vs. the $127.05 per share figure published by FactSet at the end of 2015. I expect more downward revisions to follow.

When these revisions happen, it tends to be less than pleasant. In all likelihood, it means the market will trade sideways to down further until all the “bad news” is digested. While the S&P’s forward multiple has fallen a few points to 15.2x, those arguably lofty 2016 earnings expectations likely will boost the forward multiple back up over 16x alongside slow to no earnings growth.

This means I will continue being prudent as we navigate the upcoming earnings season that kicks off today with Alcoa’s results and picks up substantially in the following days. It is better to keep our powder dry and strike when the time is right than look to be a hero and buy before the market storm gives way to a discernable path ahead.

Keeping powder dry with some exceptions like PayPal

Keeping powder dry with some exceptions like PayPal

As we get through the current storm of uncertainty and into calmer waters, we’ll continue to build out our Tematica Select Investments List. We recognize the current choppiness will likely be with us until we move past the Fed FOMC meeting in a few weeks time, but we also know volatile times like this can offer entry points that come along sparingly.While we continue to stay in a holding pattern on higher beta thematic candidates like Netflix ([stock_quote symbol=”NFLX”]) for our Connected Society thematic, the 10% drop over the last month in mobile payment company PayPal ([stock_quote symbol=”PYPL”]) puts the shares in the buy zone for our Cashless Consumption thematic that focuses on the accelerating move by consumers around the globe away from cash and checks to other forms of payment such as credit and debit cards, online payments and increasingly mobile payments.Most of us in the developed world are using credit and debit cards, and MasterCard ([stock_quote symbol=”MA”])and Visa ([stock_quote symbol=”V”]) are very happy every time you swipe one of their cards. We’ve also seen some movement toward mobile payments with the Google Wallet from Google ([stock_quote symbol=”GOOGL”]), whileApple ([stock_quote symbol=”AAPL”]) introduced Apple Pay almost a year ago. According to Gallup’s analysis, the push worked, at least to create awareness of this new product: Nearly two-thirds (65%) of consumers are at least somewhat familiar with Apple Pay. Awareness among current digital wallet users jumps to 78% and is highest (89%) among current Apple Passbook users.

In 2014, PayPal moved $228 billion in 26 currencies across more than 190 nations, generating total revenue of $7.9 billion, and the company ended the year with 162 million active user accounts, up some 13% year over year. Flash forward six months and PayPal exited 2Q 2015 with 165 million active customer accounts in 203 markets handling more than 100 currencies across its payments ecosystem that allows consumers and businesses to transact with each other online, in stores and on mobile devices.

Over the last several years, PayPal has used acquisitions to enhance its product offering and improve its competitive position in the payments industry. Past acquisitions include Braintree, an online-payment gateway used by other companies; Paydiant, an online storefront that retailers can use; and Venmo, an e-mail buddy network aimed at Millennials.

More recently, PayPal acquired Xoom to participate in the giant “remittance economy”, which refers to folks, mainly immigrants, sending money across borders. In 2014, people sent $436 billion in remittances to developing countries according to the World Bank, which projects that by 2016 global remittances will rise to $681 billion, with remittances to developing countries landing at $516 billion. Despite that growth, JPMorgan Chase ([stock_quote symbol=”JPM”]), Citigroup ([stock_quote symbol=”C”]) and Bank of America ([stock_quote symbol=”BAC”]) have scrapped low-cost services that allowed immigrants to send money to their families across the border. Remaining competitors in the remittance arena include Western Union ([stock_quote symbol=”WU”]) and Moneygram International ([stock_quote symbol=”MGI”]).

As impressive as those figures are, we find the following figure to be far more interesting — PayPal Payment Services process 30% of U.S. e-commerce transactions. Now think of how consumers are shifting their buying from brick and mortar stores to online offering such as Amazon ([stock_quote symbol=”AMZN”]), Macy’s ([stock_quote symbol=”M”]) QVC, Zappos and other e-tailors as their shopping medium moves from walking the mall to pinching and scrolling on a tablet or smartphone.


How does PayPal make money?

Like Visa, MasterCard and other by bank-sponsored credit-card operators PayPal operates within the interchange network, which charges a merchant a “take rate” of about $2.80 per $100 transaction on average. Most of that take goes to the card issuer and the rest to processors such as PayPal for facilitating the transaction. On about 40% of its transactions, PayPal takes the full 2.8%, because customers have transferred the money directly from their bank accounts. In these cases, PayPal runs the payments through its own network, away from the card companies’. Last year, transactions of these types accounted for 89% of the company’s net revenues of $7.9 billion. The remaining revenue was derived from a variety of services, such as interest and fees on credit receivables, subscription fees, and revenue sharing.


Think about it: Every time a person upgrades to a newer iPhone model, that’s another potential Apple Pay user. And as Apple adds more banks to the program and expands around the globe, that should mean more Apple Pay users, too. The same holds for Uber, Airbnb and others that like Apple Pay utilize PayPal’s Braintree payment gateway to complete transactions. Just because we don’t see people paying with PayPal in stores doesn’t mean it’s not being used. This makes PayPal a bullet play on mobile payments guns like Apple Pay and others.

Much like Visa and MasterCard, this means dollars go to PayPal whenever a transaction crosses the company’s Braintree-powered platforms. To me, that makes PayPal far more interesting as a “Buy the Bullets, Not the Gun” play on the Cashless Consumption thematic than many other options.

Over the next several years, Forrester Research sees US mobile payments growing from $52 billion in 2014 to $142 billion by 2019, and with new entrants such as Facebook ([stock_quote symbol=”FB”])entering the fray, PayPal’s behind the scenes gateway opportunities look promising, particularly for mobile payments.

The combination of this rising tide and bullet position that could expand the number of merchant and retail relationships now that PayPal is freed from eBay bodes well for continued top and bottom lie growth.  Today PayPal services roughly 75 of the top 100 online merchants and closing that gap could add meaningfully to 2016 expectations and beyond.

PayPal shares are currently trading at 23.5x expected 2016 earnings of $1.49 per share (up 20% year over year), inline with similar multiples for MasterCard and Visa, the latter of which is only slated to grow its earnings 14% year over year in 2016. Applying a discounted price to earnings growth (PEG) ratio relative to those accorded to Visa and other competitors suggests upside to $45 for PayPal over the coming 12-18 months.

With only a limited trading history for PYPL shares, to assess the downside we’ve looked at trough multiples for Visa over the last seven quarters and applying those multiples implies potential downside to $32 for PayPal shares in the coming quarters. Given last night’s closing price of $35.07 and a risk-to-reward ratio skewed to the upside, we are adding PYPL shares to our Tematica Select Investments List as part of our Cashless Consumption thematic. In the expected market chop, the closer to $32 PYPL shares get, the more aggressive our recommendation becomes.


 IPAY is Our ETF Play on Cashless Consumption 

For those looking to place client funds in a more diversified play on the Cashless Consumption thematic, in lieu of PayPal shares we’d recommend PureFunds ISE Mobile Payments ETF ([stock_quote symbol=”IPAY”]), which debuted in mid-July, and counts Visa (V), MasterCard (MA), American Express (AXP), and PayPal among its top holdings. On a combined basis those four positions account for 24% of IPAY’s overall holdings.