Motley Fool Hidden Gems Investing - PayPal Turns Around (Slowly)

Episode Date: April 30, 2024

Alex Chriss is still early in his tenure as the CEO of PayPal, but the company’s turnaround is already showing green shoots. (00:21) PayPal’s earnings and why a drop at a specialty insurance company could be a buying opportunity for investors. (16:57) What to do before you meet a financial advisor, and some questions to ask in an initial meeting. Companies discussed: PYPL, INTU, ZM, KNSL Host: Ricky Muvley Guests: Matt Frankel, Alison Southwick, Robert Brokamp Producer: Mary Long Engineer: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Yeah, thanks for having me. I'm excited, too. We're in my favorite part of earnings seasons right now. Why is that? It's all the companies that I follow. Like the two we're about to discuss today, but like this week it's, I'm just, you know, it's crazy. I'm going to be working until 10 PM every day this week. There you go. Yeah. The reason, the reason why we've called you here, we got PayPal and Kinsale, which are two companies you follow closely. And maybe for a listener, one of them is a lot more known than the other. So let's start with PayPal, which reported this morning. This was the third call for the new CEO, Alex Chris. He's still early in his tenure, but do you think he's starting to deliver on that promise he made in the first call

to make PayPal a much more focused and profitable company? The short answer is yes, but it's also important to know that Alex Chris isn't just the only new part of the team. PayPal literally got rid of its entire C-suite. Alex Chris started his tenure in September, and everyone else on the key leadership team is newer than him. Some started in January of this year. Some are just being appointed now. I think they just added another key board member this past week. It's a really interesting time. It's really rare that a company of this size and this dominance in what it does just wipes the slate clean and brings in a totally new management team. But on the efficiency question, absolutely. This is what was the big surprise to

me in the quarter. There were two big surprises. This was one of them. PayPal's revenue grew by 9% year over year. Its earnings per share grew by 27% year over year. Anytime you see earnings from an already profitable company growing that much quicker than the top line, they're doing something right when it comes to efficiency. Yeah, they're also doing hundreds of billions of dollars in payment volume, so those percentages become a little bit harder to come by. Yeah, Chris is an outspoken CEO. In this call, he took some pot shots at the previous administration of PayPal for essentially their relationships with small to medium-sized businesses. He called out Zoom for being a company in stagnation. And usually, you hear leaders

say, this is a company we want to be like. We want to be like the Taiwan semiconductor of artificial intelligence. And in this case, you have Chris saying, look at Zoom. They stagnated, and that's exactly what we don't want to be like. He's got this more, I would say, deliberate, straightforward approach than you see in a lot of CEOs. Yeah. He came from the small and medium-sized business world. He was CEO of Intuit, if you're not familiar, which is the company behind QuickBooks, which

is the small business accounting software package. It's not surprising that that's a key focus area of his. And he's absolutely right that PayPal just completely stagnated. The previous management strategy was generally that we're going to keep growing our user base forever and ever until every person in the world uses PayPal. That clearly didn't pan out. And then they were kind of a disjointed strategy. I don't know if you remember when they were going to acquire Pinterest. I've heard the stories. And then just scrapped it because everybody who heard it was just like, why? So it was just really

a disjointed strategy they abandoned their core growth strategy which like you said small and medium-sized businesses and just kind of were just figuring like throwing spaghetti at the wall to see what sticks yeah it has it has a couple of powerful tools over at paypal they didn't need pinterest i'm going to give you let's do a menu of topics of what was talked about in the quarter and then you can you can pick pick from the menu what stood out to you so here's a few of them Number one is Chris is trying to grow the fraud prevention services, which Chris called best in class. It's a key differentiator. They inked a deal with DraftKings for fraud prevention.

There was a 21% increase in users on the Venmo debit card. It's working on linking that to Google Pay and Apple Pay. I would say a reporting thing that stands out to me is that PayPal is now reporting stock-based compensation as a part of non-gap metrics, which is going to change a lot of those comparisons, but gives a lot more clarity to those investing in the company. Hey, we got a stable coin. How about that? PYUSA, they're hoping to eliminate fees on those cross-border transactions for users on Venmo. And then active accounts grew sequentially, which is a little bit of a reversal from recent trends. There's your menu board, Matt Frankel. Which would you like to

order from? Well, let's start with the two different Venmo topics. That was the Venmo debit card and the stablecoin. Venmo has been an area that PayPal has struggled to monetize for a long time. It's a big part of its payment volume. I want to say it's roughly one-fourth the company's entire payment volume. One-fourth of $1.6 trillion of annualized volume, that's not nothing. They've really had a hard time figuring out the best ways to monetize that. The Venmo debit card is huge because they will get some kind of take rate from each transaction there. It's not just like if I Venmo you some money, they really don't make any money off that transaction. It's a really good way to monetize. The stablecoin, we could talk all day about my

thoughts on cryptocurrencies and stablecoins and things like that. But anyway, cross-border transactions are expensive. This is why credit cards with no foreign transaction fees do so well in the marketplace. So, anything you could do to eliminate that charge and maybe even increase your own margins by being able to offer that, and kind of as a back-end on their infrastructure is being able to move money around for free, it's something that I'm excited to see develop. And it sounds like another kind of piece of the efficiency puzzle. Yeah. I think it's easy to dunk on the, the stable coin, but if they can solve a lot of those, those cross border transactions, that's, that's huge. And also, I mean, among its competition, I am, I'm more willing to trust

that PayPal has a dollar to back up every single one of their PY USAs, or at least they can make good on it. I know you want to talk about the active accounts though, because that's, that's a part of the story that's not getting covered a ton, but I know stands out to you. Yeah. So The headline number is that the number of active accounts on PayPal declined by 1% year-over-year, which is about 4 million people. But that doesn't really tell the full story. PayPal had four consecutive quarters, quarter-over-quarter declines in their user base. This is the first time in the past five quarters where they reported a sequential growth of about a million active users quarter-over-quarter. That's especially big in the

first quarter because it's bad seasonality trends. A lot of people are active in the fourth quarter for holiday purposes, in simple terms, and drop off the platform in the first quarter. So even including that, they net added some active users this quarter, which is a nice reversal. I'm a PayPal shareholder, so I'm bringing in some bias to this next question I'm about to ask you. PayPal, they raised revenue guidance, which they got hit for in the past for essentially lowering it. They expanded the operating margin. They're adding users. What's going on with the market? It's just a completely lukewarm reaction to these results. The biggest raise they made was actually earnings guidance. In their fourth quarter report,

expected earnings to be roughly flat this year. Now, they're saying a mid-to-high single-digit percentage growth. That's a pretty big adjustment. But the question is, is this just one-time efficiency adjustments that the new CEO is making? Obviously, more earnings is better than less earnings. If their full-year guidance comes true, PayPal trades for something like 11X earnings right now. It's a really cheap stock. You would expect a bigger reaction, especially when you're considering not only the earnings growth, but the top and bottom line beats this quarter. You have the accounting change, which I love the accounting change. We've got to hit that in a minute. The return to growth in the active user

base, you would expect a better reaction. I'm a PayPal shareholder, too, and I expect a better reaction. Let's hit the accounting change. I can't title the episode PayPal Makes an accounting change, but why is this something that the investors should care about? Well, they changed the way that they report adjusted earnings. A lot of commentators, including Warren Buffett and Charlie Munger, have always looked down on adjusted metrics because they don't really take everything into account that actually is a cost. PayPal specifically, and this is the only time I've heard of it, maybe you've heard of other companies doing this, they're now reporting stock-based compensation as part of their

adjusted earnings. Normally, that's the adjustment that you see these tech companies make to make their earnings look better than they are. But now PayPal, they're owning it. They're saying, here's what we're paying our people. And it's not just that they made the accounting change, they're actually adjusting their incentive plan to better align with shareholder interest, not just, here's your pay in stock. We're going to give you more stock if you deliver returns for shareholders. And I love these changes. I wish, I hope other companies follow this lead because we're not the only ones who kind of think it's, it should be included in earnings. It is an expense. So I'm happy to see it. It's something that might hurt the models, but Chris was talking

about on the earnings call, they're saying, we're not going to hide this. This is, we're a pay for performance culture. And so we're going to, we're going to highlight it. I want to move to Kinsale because this is another, what I would describe as a befuddling market reaction. I know Kinsale is familiar to us, but for those listening who haven't heard of it, this is a company that focuses on excess and surplus insurance for your hard to reach places. So if you're a business or an event and you have a tough time finding insurance, Kinsale will help you. Think about If you want to host an equestrian event inside of a weed dispensary, Kinsale will help you with the insurance for that. Why should you care from what we're about to talk about? Matt on Twitter

was saying this is a massive buying opportunity, so we're going to find out why. But let's focus on the business first. The company is getting beaten up essentially because of the slowdown in growth of its premiums, but it's also getting a lot more in terms of investment income. So, that's the table. What's going on with this business right now, Matt? The investment income, that's not really their doing. You really can't give the company credit for that. That's like saying, my savings account is making five times what it was two years ago. I didn't do anything smart. The interest rates went up.

Kinsale, like you mentioned, they're in specialty insurance. The key thing to know about that business, one, it's really hard to do, which is why They have companies like Kinsale, and you can't just go to Progressive if you have a demolition business or something else that's really hard to insure. So, these companies exist because they're really good at what they do. And if you're good at it, it's very profitable. Most insurers are happy with an underwriting margin of 3% to 5%, and then they make the rest of their money on investments. Kinsale's underwriting margin averages more than 20%. I think it's something like seven times the industry average. It's just their underwriting margin before we even get into

investments. It was a slowdown in growth, if you want to call it that, but it was. Gross written premium growth was 26% versus 34% year-over-year in the previous quarter. net investment income. You mentioned it was up 59% year-over-year. It was up 71% in the previous quarter. In my opinion, this is the big reason we saw the reaction that we did. The combined ratio, which is an indicator of underwriting profit, went from 72.1%, which is subtract that from 100, you get your underwriting profit. So lower is better, to 79.5%. So about a 7.4% jump in the wrong direction in the combined ratio. And that's why I think the market reacted the way it did. So quickly, underwriting profit, essentially, what's that mean?

Sure. So if I'm an insurance company, I collect $1,000 in premium. Some of that's going to get paid out as claims. That's what you call your loss ratio. And some of it's going to be used to just run the business. I have to pay my office rent, things like that. Add the two of those together, you get your combined ratio. So whatever's left after your combined ratio is your underwriting profit. So 100% of your money, if your combined ratio is 90%, the other 10% will be your underwriting profit. So can sales underwriting profit, put in more simple terms, went from about 28% to about 20%? Okay. The other trend that's going on here is, and I haven't seen a lot of discussion about this, is the rise of seeded written premiums,

which essentially means that Kinsale is transferring their policies to a reinsurer, to someone else. What's going on with this? Why are they spending so much more money on reinsurance right now? That's not necessarily a terrible thing. It's kind of like a sportsbook laying off some of the action it receives. Insurance is an inherently risky business. Specialty insurance is riskier than most. and reinsurance policies are used to cap an insurer's losses. A lot of it could be because we're entering peak hurricane season. A lot of insurers get scared when you get to the second and third quarter because that's when all the natural disasters tend to happen. I don't know

if that's what the management's thinking there, but they're definitely shifting some money into reinsurance. It's a common part of the insurance business. You don't want a natural disaster to wipe out your business. You want to make your losses manageable. If that means spending a little more on reinsurance, then so be it. And by the way, that combined ratio under 80% is still pretty great. So just so investors know. And then finally, you went out on the X platform, the platform formerly known as Twitter, calling this dip on these results a massive buying opportunity. Lay out the thesis. Why is this a massive buying opportunity for Conceal Capital? Well, even if it slows down, 26% growth is still growth. Even if your underwriting margin

dropped to 20%, that's still seven times what the average insurer is making. Now, the biggest reason for this reaction is because Kinsale is generally priced for perfection. They have a great history of under-promising and over-delivering. Just for example, Kinsale trades for about 25 times forward earnings and about seven times sales. I own another insurer called MetLife. I'm sure you've heard of them. They trade for less than one-time sales and have an eight-times forward earnings multiple. So, they're a very expensive insurer relative to their peers, priced for a lot of growth. And I think that slowdown in growth is really scaring people, but it shouldn't. There's a lot of investment income that's kind of embedded

in the portfolio that we haven't seen yet. These are mostly fixed income securities. So, as they roll over to today's interest rates. You're going to see that investment income climb even further. I think there's a lot of unlocked potential on that side of the business. I like what they're doing in their investment portfolio. They're putting more money in investments like common stocks, like a Berkshire Hathaway would. Not a giant portion of their portfolio, but a lot. I love the management team. They're the only pure play in specialty insurance in the space. And they have about a 1.1% share of the market right now. So if you think that they can't keep up that 26% growth rate, they can. It's a good place to end it. Matt Frankel,

appreciate your time and your insight on this one. Always glad to be here. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region. In seconds, you'll see exactly what's behind your quota risk and fix it before it's missed. Question answered, action taken, crisis averted. When you have critical business questions that need answers, don't just file a ticket and wait weeks for an outdated report. Describe what you need and have

rippling ai build it instantly from your live people and business data whether it's a dashboard with detailed charts or automated workflows with the right triggers conditions and approvals ready to rule your business head to rippling.ai slash fool to get the only ai built to give you full visibility and take complex actions across your entire organization that's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l sign up for exclusive access today rippling.ai slash fool How do you find a financial advisor? And what should you ask them? Allison Southwick and Robert Brokamp offer up some questions to ask in that very first meeting. There comes a time in everyone's life when they need a little help and your finances are no

different. Maybe you've heard Bro over the years say stuff like, I'm Robert Brokamp. If you've had a major life event, it might make sense for you to talk to a professional fee-only advisor. Is that really what I sound like? No, but that is kind of what strong that sounds like. Anyway, this sounds easy enough, but we've heard from plenty of people over the years who struggled to find a good financial advisor they could trust. So today, we're going to tackle this topic. Bro, when should you enlist the help of a financial advisor? Well, I would put it in two broad categories. So one is you're mostly a do-it-yourselfer, but you just want a second opinion or you're about to experience a big life event. Maybe every five

to 10 years, you would just make sure that your retirement plan is on track or you're getting close to retirement and you want to make sure you have all your bases covered. Or you may have just one big question you'd like help answering. One of my favorite personal finance columnists is Christine Benz at Morningstar. She knows about as much as anyone about financial planning, but when she and her husband were trying to determine whether they should get long-term care insurance and how to take care of long-term care, they hired a fee-only financial planner to help with that decision. So basically, you just want occasional help. But the other situation is you don't want to be mostly a do-it-yourselfer. You want an expert to be helping you along the way

every day, though maybe not your entire portfolio. And it could be because you're just very busy with your career and your family, and you don't have the time to become a financial planning and investing expert in your spare time. Or it might be because you're getting up there in years and you want to begin a relationship with a financial advisor now in case something happens to you, especially if you're the person who primarily handles the finances for the family. All right. So, not all financial professionals are alike in their credentials, qualifications, or expertise. So, how about you break it down for us? What are our options here? Yeah, it's very confusing because you'll hear a lot of terms, and they're almost

meaningless. Financial advisor, financial planner, financial consultant, wealth advisor, wealth coach, because there aren't many regulations. Just about anyone can call themselves a financial advisor. So the main differentiation I think to look for is whether someone is a broker, which means they sell products, or a registered investment advisor who is required to act as a fiduciary. We'll talk about this a little bit more later on. But basically, a fiduciary is someone who is legally obligated to put your interests first. You would think that all financial professionals should be held to that standard, but that's not the case. The other thing to look for is designations. There are a bunch. I'm just

going to highlight the biggest. For financial planning, the granddaddy of them all is the certified financial planner designation. It requires you to take six classes, pass a pretty hard exam, and have three years of experience. One that is gaining more popularity is the Chartered Financial Consultant. You'll see it as CHFC behind someone's name. Also, you have to take classes, one more class than the CFP designation, have to have experience, you don't have to pass an exam. If you're looking for someone who's like a real investment expert, the thing to look for there is the Chartered Financial Analyst or CFA. My opinion, that is by far the hardest one to get. You have to pass three very difficult exams. I know many very smart

people who failed one or more of those exams until they eventually passed it and got it. Taxes, of course, you're looking for a certified public accountant, CPA, but some of them also have another designation called the personal financial specialist or PFS, which basically means they're a tax expert, but they also know financial planning. They're very knowledgeable about many aspects of your finances. If you're looking for someone to help you with insurance decisions, you're looking for the chartered life underwriter or CLU, which is a designation that shows you know something about life insurance, estate planning, maybe business planning. Those are the biggies. You'll find plenty of other ones. Some are meaningful,

some are not. The key is to look at the requirements in terms of classes, in terms of experience, and whether they had to pass any exams. All right. Where do you find them? Well, I'll start with the one everyone starts with, and that is referrals. You talk to people you know, you talk to professionals you work with, your attorney, your accountant, see who they recommend. The only thing I would say about referrals, though, is that in my experience, a lot of people are very happy with their financial advisor, but then when I ask them questions about what the financial advisor does, the financial advisor actually is very good, they just like the person, and they're not

knowledgeable enough to know that they're not getting good service. But still, referrals are a good place to start. But really, since the early days of The Motley Fool, we have recommended that you look for a fee-only financial planner. Most of these fee-only financial planners, first of all, They are paid for their service. They don't sell you products. And they are fiduciaries. And there are a few places to find these people. The first I'm going to mention is the one I know the best, Garrett Planning Network, started by Cheryl Garrett. I've known Cheryl for many years. She was very kind enough to let me attend her conferences here and there. So I've gotten to know a lot of their members. In fact, I spoke with their current managing director, Eileen Freiberger,

and got some input from one of their financial planners, Christopher Lazzaro, just to get the insider view with input on this episode. That's a place to start. There's also the National Association of Personal Financial Advisors, or NAPFA, and the XY Planning Network. You'll find that there are planners who belong to two or all of these networks because they're all fee-only financial planners. Most of them will manage money for you, but many of them will also just do projects and charge by the hour or the project. Then finally, I'll just add, if you work with financial services firm that you're happy with, like Vanguard, Fidelity, Schwab, T. Rowe Price, all of them provide wealth management and financial planning services. So you could look to

them, but just expect that many of their solutions will be their own products, right? If you're going to have your money managed by Vanguard, chances are they're going to put all your money in Vanguard funds. So there is a little bit of a conflict of interest there. So not only do financial professionals have different scopes of work. Some might be absolute crooks. Sorry to say it. Some might be incentivized to line their own pockets. Some might be incompetent. Some might be right for someone else, but not so right for you. So how do you evaluate these people? Well, first of all, you want to make sure they're not crooks. And there are a couple of ways to do that. You could check what is called broker check offered by FINRA. So it's brokercheck.finra.org.

FINRA is the self-regulatory organization for brokers. Then there's the Investment Advisor Public Disclosure website offered by the SEC. That is at advisorinfo.sec.gov. You check them. First of all, we'll find out whether that person is registered, in what states they're registered, and if there have been any complaints. If someone has been in the business long enough, they might have one or two complaints, but you just want to see what those complaints are and make sure that they were resolved. If someone says that they have a certain designation, go to the website of the governing board of that designation to make sure they actually have it. And if they don't have a designation, you might still go to that website because in some

situations someone had the designation, but they lost it due to some sort of ethics violation. And you'll find that on the website. So, you know, go to the website of the board of the Certified Financial Planners and CFAs. If you're going to work with an attorney, go to the website of the State Bar Association to make sure that everything is fine there. Do those kind of checks. But then once you have gone through these various processes, you should identify and interview multiple planners. And they will likely allow you to do what's something called a get acquainted meeting where you talk for maybe a half hour or so and just make sure that they can provide what you're looking for and that you're comfortable with working with them. All right, let's go through

some questions you'll want to ask in this meeting, as well as the answers that you're going to want to hear. So the first question to ask is, what are your qualifications slash credentials? Maybe don't say the slash. Yeah. So obviously they'll probably highlight some of the designations they have. They'll highlight their experience, maybe talk about how they became a financial professional. And that's always an interesting question too. What brought you to becoming a financial professional. There are some things that they may have that are not listed on their website. For example, for me personally, I got my master's in personal financial planning. That would be something you would look for. What was their education? But really, what you're

looking for are the comfortability that you find with them talking about their qualifications. Do you feel comfortable that they know enough to provide what you're looking for? All right. Next question. Are you a fiduciary? We touched on this a little bit. The tricky part about a fiduciary is you can be a fiduciary in many ways. You might be a fiduciary because you work for a firm that is a fiduciary, like a registered investment advisory firm. You could be a fiduciary because of the designation you have. Your firm may not require you to be a fiduciary, but for example, if you have the certified financial planner designation, you are expected to act as a

fiduciary. Then there are circumstances in which you have to act as a fiduciary. The Department of Labor just passed a rule that said, if you are advising someone on their rollover from a 401k to an IRA, starting this September, you have to act as a fiduciary. Part of it is going to happen this September. Another part, next September, expect that the industry is going to protest this, especially the insurance industry. So, we'll see if it happens. But what you're looking for is for them to explain whether they are a fiduciary, whether they understand what a fiduciary is. There are circumstances in which you might find a very good financial advisor who's not technically a fiduciary. So, what you're looking for there is that she or he is explaining to you

that they are looking out for your best interests. All right. Next question is to ask, how are you compensated and what are the all-in costs I'll be paying? Yeah. This is where the difference between a fee-only planner and a broker really comes in. Sometimes the solution someone provides will generate a commission for them. You just want to be very clear that the advice you're getting is the best thing for you and not the thing that is going to generate the biggest commission. You want to understand how they are getting paid so you can understand any potential conflicts of interest. These days, more and more people are charging an assets under management fee. The average is about 1%. It's usually a little

bit higher if you have a smaller account, smaller being like $250,000. It's usually lower if you have over a million dollars. But even in that situation, you want to find out, is that the only fee? Because if you're paying the advisor 1% a year to manage the money, but then they put you in mutual funds or separately managed accounts that charge another 1%. In that case, the all-in cost is 2%. So, you want to be very clear about that. Now, if you are looking for just a one-time analysis or a one-time financial plan, you're going to have to pay by the hour or by the project. The fees on that are going to vary based on the experience of the planner as well as the city they live in, but expect to pay anywhere between $100 and $500 an hour, or on a project basis,

$1,000 to $10,000. Again, based on the person's experience, but also the complexity of your plan. Next question to ask is, what's your investment philosophy? If you're going to have someone manage your money, you want to make sure that you are at least mostly on the same page. You'll find that many fee-only financial planners are pretty committed indexers, not exclusively, but a lot of them are. If you are an active stock picker, you don't want to choose a financial advisor who's just going to put you in index funds unless you are looking for something besides wealth management. I'll just point out when I was talking to Eileen Freiberger about trying to find a financial advisor, she has said that often many

people from many readers and members of The Motley Fool reach out to them, and they're looking for advice about stocks, their portfolio, and stuff like that. Many of the folks at The Garrett network don't look at individual stocks so much. It's just important that you are finding someone who could provide what you're looking for. These are all great questions. I know one red flag that I saw when we were researching this is that your advisor should actually do more listening than talking. I know we just did a bunch of questions to ask them, which would require them to do a lot of talking. But one of the good pieces of advice I saw was that your advisors should be very, very interested in you, your interests, what you want, your goals,

and you should be doing more talking than they should. As always, people on the program may have interests 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. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. Bye.