Banking News

Does Banking’s Future Begin With ATMs?

Twitter (NYSE:TWTR) falls after permanently suspending POTUS from hts platform. NCR (NYSE:NCR) tries to outbid Apollo Global and Hudson Executive Capital to buy Cardtronics (NASDAQ:CATM), an operator of ATMs. Shares of Lululemon (NASDAQ:LULU) rose on increased guidance. In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Jason Moser analyze those stories, discuss Airbnb‘s (NASDAQ:ABNB) recent IPO, and share what they are going to be looking for on conference calls when the big banks report earnings starting this Friday.

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This video was recorded on Jan. 11, 2021.

Chris Hill: It’s Monday, Jan. 11, welcome to MarketFoolery. I’m Chris Hill. Joining me today, it’s Jason Moser. Good to see you my friend.

Jason Moser: Good to see you.

Hill: We got a lot going on this Monday. We’ve got a financial deal in the works. We’ve got increased guidance from one company. We’re going to talk IPOs. We’re going to get a quick preview of big bank earnings, but I’m going to start with a statement I’ve said a couple of times recently, which is that on this show we focus on business and investing. That’s what this show is. But given the events over the weekend, I have to start today with something that is outside the realm of business and investing. I’m referring, of course, to the Cleveland Browns, stunning the sports world [laughs] by going into Pittsburgh and drubbing the Steelers 48 to 37, are you kidding me? [laughs] I thought there was something wrong with my ESPN app when I looked at my phone and it was 28-0 in the first quarter. This is crazy.

Moser: That was impressive and Chris, I’m going to say this now because sports betting is legal and we’re seeing the proliferation of it everywhere. Proudly for all of you Cleveland Browns fans there, I know the Browns were the underdogs. I took the moneyline on the Browns yesterday, so I am a happy camper. I took the over and the Browns on the moneylines. Yesterday was a good day.

Hill: It’s one more reason.

Moser: [laughs]

Hill: It’s sad we’re not in the office because coffee would be on you today if I had known that.

Moser: That’s right.

Hill: Let’s start with Twitter because shares of Twitter are down 6% this morning. As most folks probably know late on Friday, Twitter permanently suspended the President of the United States from its platform. I look at this sell-off today Jason and it makes perfect sense to me, because for whatever you think of the President of the United States he had 88 million followers on Twitter, and was a huge driver of engagement on that platform. That’s what Twitter’s business model depends on. They have yet to improve on a sustainable basis that they can increase engagement dramatically or even methodically. I understand the sell-off.

Moser: I mean, it was a little bit worse earlier in the day. I do agree with you, regardless of how you feel about what’s played out here, t. The fact of the matter is that Twitter has certainly benefited, the business has benefited from his presence over the last four years. This is the danger of relying on politics, whether you want to or not, Twitter is a platform that is probably known for politics more than anything else. We obviously have a robust investing community on Twitter, but I really do think politics overshadows all of it. The problem is, when you have such a large presence in the political spectrum, you’re going to make decisions that alienate half your platform almost always. There’s no question that this decision that they’ve made, and this was not a unique decision, we’ve seen this decision made across many platforms, but this kind of decision that’s going to alienate ultimately half of your users, and yet President Trump had 88 million followers.

To put that into context, in Twitter’s most recent earnings release, they reported average monetizable daily active usage. That’s that metric they use now to basically measure engagement in terms of the business. That number was 187 million users. Essentially, Trump’s following represents essentially half of that, their user base. That 187 million, by the way, was up 29% from a year ago. Over the last four years, like I said, the business has benefited from his presence, because it has kept engagement up, and I think that you’re right. They haven’t really proven that they are going to be able to sustain and grow engagement in a post-Trump world. To assume that engagement could be impacted from this decision, I think, it’s a reasonable assumption. Does it affect the advertisers? We’ll have to wait and see. Over the long-haul, maybe this is just a breakeven decision, a bit of a tougher decision in the short-run on the business, but maybe over the long-run it creates a healthier environment for Twitter users and that works out. I don’t know, they just have to wait and see there.

But to me, honestly, you hit the nail on the head there in just proving engagement beyond this, I think they’ve got bigger concerns. It’s very difficult to see, you have to understand exactly what the end game is here, because Twitter today, for all intents and purposes, it’s the same as we’ve always seen. It’s just the same Twitter we’ve been using minus a couple of bells and whistles here and there. I think the biggest innovation we’ve seen from Twitter in a while is Fleets, I’m not impressed and I don’t make them, I don’t use them. Judging from my timeline, the novelty on Fleets is worn off. As a former Twitter shareholder, I don’t regret not owning these shares anymore, I do still use the platform, but as a user I can see plenty of challenges on the horizon.

Hill: Like you, I didn’t really understand Fleets when it first launched, but I did allow that — look, I’m not interested in this, but I could see other people do. That thought went away recently when I saw a few different people on Twitter with followings of a decent size where they went out of their way to say, “Hey, just because I put out Fleets, it doesn’t mean I engage with people who react to my Fleets.” I just thought, “Oh boy! That’s not working for Twitter.”.

Moser: Yeah.

Hill: Let’s move on to, I was going to say the deal of the day, but it’s not a done deal yet, and it is right up here early so I want to get your thoughts on this. This is NCR offering to buy Cardtronics for $39 a share in cash. Cardtronics operates ATMS and financial kiosks. Cardtronics actually had a deal in place last month with Apollo Global and Hudson Executive Capital that was for $35 a share, NCR bumping that bid up. What does it say to you about either this space or this investment opportunity that shares of both NCR and Cardtronics are down today? I would have thought at a minimum Cardtronics would be up, just because if this deal goes through, they are getting a higher bid.

Moser: Yeah. To your point, there’s an offer on the table, there is no deal yet. You can be forgiven if you see the headline and think, “ATMs, WTF! What does this all do? ATMs, really? Come on.” That’s a very fair question. To me, when you think a little bit deeper, this is really about the transformation of the physical banking branch. Being able to do more and more stuff via the ATM versus actually, I need to go into the actual branch, I think that’s something that does exist, I think that’s a strategy that exists out there today. It’s not just about going to an ATM to get cash, it’s about automated banking, it’s about having essentially a smaller branch, a branch that you can do just as much with an ATM as you would with a physical branch and you don’t have to staff the physical branch, you don’t want to pay for the real estate for the physical branch.

Part of that is what the deal is about, but you have to look really at what NCR does in total to get a better grip on it. They serve a few different industries, they serve banking, retail, and hospitality industries, and so let’s focus on the banking segment, because really that’s more than half of the business, so that’s what really matters here. Actually, interestingly enough, the ATM business, in 2019, grew revenue 29%, and that goes toward that being able to do more banking via ATM versus actually having to go to the branch. But they offer all sorts of different solutions, it’s not just a hardware ATM business, it’s customer-facing digital banking, digital connected services, software solutions, ATM management systems and software, payment processing. But there’s another interesting angle to this business and Cardtronics owns a debit network, and that debit network is called Allpoint, that’s part of the Cardtronics business.

Part of this acquisition is actually getting hold of that debit network, and so I do understand wanting to be able to bring that into their business, because NCR does also have a payment offering. They made an acquisition of a little company called JetPay, it was a merchant acquirer, they made that acquisition, I think, back in 2019. A debit network would be something that would not really overlap with their current business, it would be a bit more complementary and a little bit more recurring, and so I think part of the deal really does center around that debit network. You look at Cardtronics’ economics, you look at the financials, it’s a smaller company, it’s a true small cap, the financials show that it’s having some trouble growing. It’s a competitive environment particularly for a smaller company, and so NCR can swoop in there. Even at $39 a share, it’s not an excessive valuation so they can offer a little bit of an olive branch there and say, “We’ll pay a little bit more because we feel like there are some complementary sides of your business that will roll in our portfolio,” including that debit network, I do get it.

Hill: Shares of Lululemon Athletica up a bit this morning after the company raised earnings and revenue guidance for the quarter that ends on January 31st. CEO Calvin McDonald said Lululemon had a strong holiday season. How strong? I guess we’re going to find out next month. But a nice reminder that, before the earning season really starts to hit up, we’re going to start to hear more of this from retailers. We’re going to start to get more tea leaves from not just specific retailers like Lululemon Athletica, but the general ones like Walmart, Target, Costco, etc.

Moser: Yeah. I’m not surprised to see Lululemon report this, preannounce this, because really this is a time when a lot of folks are at home, exercise is becoming a bit more of an option for many of us than it probably was before when we were running all around and trying to make schedules work. Lululemon has done such a good job over the past several years of really owning the brand and the experience. It’s a business that has made a concerted effort to not rely on wholesale, there’s a wholesale dynamics of the business, but not to the extent that you would see with other retailers, and I think that’s something that is starting to pay off.

The Mirror acquisition is another compelling one I think, it remains to be seen what they ultimately do with it. They didn’t pay an arm and a leg for it, it was about $500 million I think that acquisition was. If you look at Lululemon’s acquisition of Mirror versus Under Armour, $500-some odd million they paid for those silly little apps that they’ve now divested, no question. I can see a bit more of a path toward profitability in growing the business with Mirror, that’s something I think that could potentially pay off down the road. Management has been focused on what they call the Power of Three growth plan, it’s something they introduced, I believe, in 2019.

Moser: Nothing revolutionary here, but the power of three, these are the three drivers. These are the three principles that are really driving their growth strategies, product innovation, omniguest experiences, and market expansion. They continue to do things that line up with these three prongs of that strategy, of that plan. It seems to be working out. Clearly, Lululemon has been a wonderful holding over the past several years for investors. I really don’t think that’ll change, and I think a lot of that really goes back to just their ability to truly own that brand and the experience.

Hill: I really can’t wait to see what numbers, if any, they share about Mirror. I’m curious about the overall report. But just the fact that so much of their at least television and video, if you see YouTube ads and that sort of thing. So much of their video advertising strategy at the end of 2020 was geared squarely at Mirror sales. I’m interested to see if they were able to move the needle on that.

Moser: Me too.

Hill: is our email address, we got a question from Alan Bishop, who writes, “Recently, you mentioned that Airbnb only sold a small portion of the company during the IPO. Is that typical, and is that perhaps one reason why the stock price doubled? Lots of people want to own the stock but very few shares available for sale. I’m wondering if, as the rest of the shares are sold by insiders, will that bring down the stock price?” Thank you for that, Alan. Yeah. I mean, typically we see in an IPO, companies deciding, one of the decisions they make in that capital raise event is what portion of the company are we going to sell off? I don’t remember specifically what it was in the case of Airbnb, but I remember thinking at the time, “They’re just putting a little slice out there.”

Moser: Yeah. I mean, the goal isn’t to sell your company, the goal is to raise money so that you can really grow your business, and going public is a fantastic option for that. I mean, with Airbnb, it does come down to just economics 101, supply and demand. When you have a company that puts a limited number of shares out there, you’ve got a ton of enthusiasm behind them to boot. You’re going to see demand really ramp up on a very limited supply of shares, and so that to an extent is normal. I think that’s what makes it so difficult with some of these IPOs to really price them effectively. Because you have to try to gauge not only the psychology behind the investors at the time of the IPO, but also just generally market conditions. Anything can happen at any given point in time, information travels so quickly.

But to your point about owners selling off some of their holdings, as lockups expire, there will be shares, more shares will become available, and it’s always something to keep in mind. I mean, lockups are something that make a good financial media forum. Because in theory, as lockups expire and more shares are available, then you would see some selling, which would drive the price down. But by the same token, we know the market is a forward-looking mechanism. But a lot of times, I mean, that stuff is priced into it. I mean, that’s not unknown information, that’s information we all know. It’s information you can find in the 10-K. We probably don’t see that big of a movement on lock-up expiration as maybe we once did. But yeah, regardless, I think it’s something very common. It does boil down just to supply and demand, and right now, the demand for those limited amounts of Airbnb shares is high.

Hill: We also got an email from Jay in Columbus, Ohio. He writes, “I did some boots on the ground research. It appears that Chipotle‘s new cauliflower rice is a hit. [laughs] The guy behind-the-counter said it’s sold out and seems to be popular already.”

Moser: Hey, you folks out there like that cauliflower rice, huh?

Hill: Apparently.

Moser: Well, I told you. When we were talking about that on Motley Fool Money on Friday, I’d gone through Twitter just to get the gauge. It did seem like the folks who were trying it really liked it. I mean, hey man, it’s not for me, but it’s clearly for plenty of people out there, and that’s great to know that it’s a hit, because like we were talking about two extra dollars is two extra dollars.

Hill: Absolutely. I think [laughs] if this continues to play out the only question for Chipotle is, do they keep this in the limited offer category, build up that excitement a couple of times a year in January, when people are maybe thinking more about losing weight? Or is it such a hands-down financial winner for them that they move it to full-time? We’ll see where they go with that. Real quick. We’re a couple of weeks away from Earnings-palooza starting up. But this Friday we’re getting the first of the big banks reporting their latest earnings: Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM). What should people be watching? What are you going to be watching with respect to the big banks this quarter?

Moser: Yeah, there are a few things. For all that we’ve been talking about over the past several months, the one word we haven’t really heard muttered a whole heck of a lot is recession. But the fact of the matter is we’re technically, I guess, still in one. I mean, it’d be interesting to hear the views on current financial conditions. I mean, it was a call back in December for JPMorgan where Jamie Dimon, the CEO of JPMorgan, who’s very adamant, and he said, “Listen, we need another stimulus package.” I mean, this is not something that’s up for debate, and it really is something that they need to see happen. I mean, as we plug through this recession and start to come out of it, I mean, I’d like to hear the perspective there on where they see things going. Along with that, I mean, clearly, the political landscape has changed significantly and in a very short period of time here. So understanding leadership’s views on not only the new administration, but really the new landscape of the Senate and how things may or may not get accomplished in DC. I mean, a lot of these banks were put on hold for a little while in what they could and couldn’t do.

Then what we’ve seen over the past several months is a lot of these banks have been reserving a lot of money because of the current recession, current economic conditions. I mean, there are probably going to be some write-offs that they have to be able to cover. But by the same token, they’re starting to look a little bit more for, particularly if we get continued stimulus, maybe they don’t necessarily need to reserve so much money. If they are able to start releasing some of those reserves toward the middle of the year, we might see a more encouraging back half of the year in the financial space. I think technology continues to interest me as far as how these big bank CEOs are viewing it. Jamie Dimon, on that same call, called out companies like PayPal and Square and even Google on talking about the investments that they’ve been making and how technology is changing the space so fast. He said something to the extent of if you have any complacency about that technology, he said, “You’re a little crazy.” So, I think he’s got that Square in his sight there, making sure that JPMorgan at least keeps up with the advancement in technology. I think the other big banks will do that as well.

Then finally, I think the one that just stands out to me, and this is a shutout to Matt Frankel, my partner in crime on Industry Focus: Financials. Last Monday he called out Wells Fargo as his top stock for 2021, which was an interesting one. It’s a value play there, because the Fed really put the hammer down on Wells Fargo earlier in regard to dividends and buybacks. This company tried to reshape its culture and all of these problems they’ve been having over the past couple of years. So, it does seem like things are starting to turn around. They’re starting to run into that nice problem of excess capital, which means they’re going to be able to start buying back shares. They’re going to be able to keep paying that dividend, raise that dividend up a little bit. I’ll be paying particularly close attention to Wells Fargo because it’s the one big bank of all that’s trading at a discount to its book value. I mean, it’s actually trading under book value and at a discount to its peers, so there’s a lot of potential here if things continue to brighten up here in 2021.

Hill: It will be interesting to see if somewhere in the next couple of months we get wind that Buffet has maybe bought a few more shares of Wells Fargo.

Moser: It could be a shrewd investment. He is a pretty shrewd investor.

Hill: Jason, thanks for being here.

Moser: Thank you.

Hill: As always, people on the program may have interest in 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. That’s going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I’m Chris Hill, thanks for listening, we’ll see you tomorrow.

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