By Paul R. La Monica
You'd expect a large-cap financial services sector fund to own the biggest banks in America: JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. And those four are all in the top 10 holdings of the Hennessy Large Cap Financial Fund.
But so are two fintechs: Coinbase and PayPal. Both of those stocks have bigger weightings in the Hennessy fund, run by manager Dave Ellison, than the big investment banks Goldman Sachs and Morgan Stanley.
Ellison said he has owned PayPal, the owner of Venmo, since its initial public offering more than 20 years ago and has held it through its ups and downs. While last year was a decidedly down one, he thinks that PayPal will continue to benefit from a generational shift toward using mobile payments, rather than traditional financial products from banks and the credit-card companies.
That change of preferences is why the fintech business has exploded. Square's owner Block, which Ellison doesn't own, and the unicorn upstarts Chime and Stripe have all joined the digital-payments fray.
"It's all about the payments. Everyone wants to be the next Visa or Mastercard," Ellison told Barron's. Visa and Mastercard are both top-ten holdings in his fund, though, so he is clearly playing both sides of the payments coin.
And speaking of coins, or Bitcoin in this case, Ellison said that Coinbase is a top holding in his fund because he likes its institutional exchange business for trading Bitcoin and other top cryptocurrencies. Ellison described the operation as like a Nasdaq for crypto, generating a steady base of fee income for the company.
Coinbase posted a profit in its most recent quarter thanks to the recent rebound in Bitcoin prices. Ellison said that it has proven that it can be profitable over the long haul.
But investors may already have figured out that Coinbase is a major player in the crypto ecosystem. Shares have soared 300% in the past 12 months as Bitcoin's price has surged.
PayPal, on the other hand, has stumbled due to growth concerns. The stock is down nearly 15% since late April 2023.
Coinbase isn't cheap, trading at more than 60 times the per-share earnings expected for this fiscal year. PayPal, on the other hand, is valued much more modestly, at an almost banklike P/E of just 12 times earnings forecasts. Concerns about increased competition from Apple Pay have hurt the stock.
Still, if you believe that fintechs will continue to eat away at the customer base of the traditional financial services companies, PayPal might be a better bet.
Many Wall Street analysts seem to agree. The consensus price target on Coinbase is $232.34, according to FactSet. That is below its current stock price. PayPal, on the other hand, has a price target of $70.61, nearly 10% above where it is trading now.
Ellison remains a believer in both companies as well as the broader fintech industry. Owning them is a way to take advantage of the shift in customer behavior even though he still has big stakes in traditional banks.
"The financial system continues to evolve away from the banking industry, " he said. "With PayPal and Coinbase, you're looking at customer growth and new products. They want to be taking market share from the banks."
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 23, 2024 14:03 ET (18:03 GMT)
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