We know, it’s exciting and hard to concentrate. We can barely focus either with Innovation Project kicking off in a little under 48 hours. The best and brightest in payments and commerce will gather at Harvard. The opening on day one is nothing like you’ve ever seen anywhere — think of it as “Hamilton” meets Innovation Project. And the awards dinner will be epic, with lots of surprises, live entertainment and winners in more than 15 categories!
It’s a lot to look forward to.
But so much talent in one room can be a little intimidating. How to stand out with so many who already know so much?
We offer the Data Dive — our weekly cheatsheet to what’s going on in the ecosystem. So, what to watch for this week? The ongoing saga over at American Express certainly stood out last week, as did Square’s first-ever earnings report and the surprise revelation that EMV chips are putting the squeeze on gift card sales.
Ready to know some more?
American Express Makes The Market Nervous
There are two possible endings for the phrase “It’s always darkest before…” that yield two rather different meanings for the expression. The first possible ending is “the dawn” and is meant as a reminder that sometimes turnarounds do happen. The other is “it goes completely pitch black,” which serves to remind that turnarounds do not always happen.
Which ending American Express will ultimately tack on to that sentence remains to be seen.
The week in menacing headlines began when Fox News reported that CEO Ken Chenault may be on his way out due to tensions with his dissatisfied board. As has been well-documented, the current CEO has struggled to gain traction with a $1 billion cost-cutting effort announced last month. So far, that effort has done almost nothing to boost stock price.
There are also rumors of a potential sale, which would “settle the succession issue,” while, at the same time, lifting a stock that has dropped by more than 25 percent in the past year.
So, who wants to buy Amex? Wells Fargo is on the shortlist, according to Fox, as part of a strategy to build a credit business.
For both their parts, American Express and Wells Fargo have denied those rumors.
But this has not stopped market-watchers from studying the share price like the Zapruder film.
Nor has it stopped pundits Jim Cramer and Jack Mohr from noting the rumor was noise and that Wells Fargo didn’t need American Express.
“Wells Fargo is a high-quality, well-managed, large-cap, diversified — yet domestic — bank that has numerous levers to pull in order to drive earnings growth amid the difficult backdrop weighing on global bank revenues. The question is not whether it has dry powder at its disposal (it does), but which form of capital deployment maximizes shareholder value,” Cramer and Mohr were quoted as saying.
“We see little value in wasting the capital on a bloated franchise with an eroding customer base,” they noted in their response to the Amex-Wells Fargo speculation.
Ouch.
And also possibly a little off base, since it overlooks a lot of very valuable assets in the Amex stable, like its corporate travel and B2B network.
When news of the Amex unraveling was at full tilt last year, MPD CEO Karen Webster wrote that the future of Amex might be to break it up and double down on the B2B potential. That was when its market cap was in the $70 billion dollar range. As of last week, the Amex market cap was at $58 billion.
B.A.R.G.A.I.N.
As for the future of Amex? Analysts weren’t so bullish. And they weren’t so confident on the speculation.
“The competitive landscape has shifted; issuers and networks alike are increasingly willing to invest heavily in customer acquisition (via generous rewards programs and sign-up offers) — despite the low rates of return — which weighs heavily on Amex’s ability to compete while preserving returns,” Mohr wrote in a report.
Moreover, he recognized Chenault’s dire need to turn things around but said Amex and its leader are likely to end up on the “wrong end of the negotiating table” when it comes to any merger or acquisition talks.
And the conclusion among analysts’ reports suggests that if (or perhaps when) a bid does come in for the payments network, it certainly won’t be from Wells Fargo.
“Unfortunately, we still don’t see any easy answers and, increasingly, see M&A as the most effective solution to improve AXP’s top-line outlook. With management most likely to again highlight organic growth opportunities, we are not optimistic AXP will be able to materially improve sentiment,” Analyst Christopher Brendler wrote in a note.
Or as two more analysts wrote…
“While the loss of Costco will pressure the firm’s growth prospects in 2016–2017, we estimate roughly $2 billion of excess capital could be generated by the portfolio sale, which AXP intends to incorporate into its 2016 Comprehensive Capital Analysis and Review submission,” Wells Fargo Analysts Jason Harbes and Matthew Burnell said in a recent report. “Additionally, we believe AXP is more interested in making an acquisition over the next two years than it has been in recent years, although we sense a bolt-on acquisition, such as Loyalty Partner (acquired in 2011 for $0.6 billion), that offered potential synergies would be of greater interest than a large transformational deal.”
The rumors had a notable impact last week, sending stock up 1.2 percent in post-trading hours, which, for this company, was a mini victory in light of the past year’s slump. Its stock remained up on Tuesday (March 8), closing just above $59.
Still, that’s a far cry from what it was a year ago. But, as MPD CEO Karen Webster pointed out in a column earlier this year, Amex has a history of reinventing itself over its 166-year history.
Yet, as she highlighted, it’s been over two-and-a-half decades, and Amex finds itself in the same position it did when Lou Gerstner reinvigorated the brand in the mid-70s. This may need a “turnaround artist to execute it,” Webster noted.
A turnaround artist, Canuck Investments suggests, that comes in and snaps up the firm due to its “terrific valuation and great long-term prospects could make this a great long-term pick.”
“Amex currently is creating a digital enterprise division, which specializes in mobile, Web and digital products. This is promising news,” the group wrote.
Canuck also spoke highly of the management team.
“Amex has great management, and if you’re a long-term investor with at least a five-year investment horizon, then Amex presents an incredible value play that contrarian investors should capitalize on.”
And all of that has a lot of analysts and payments pundits wondering: What’s next for Amex? But, more importantly: What’s next for Amex’s leadership?
Stay tuned. We may soon know both, and the answers are bound to be of interest.
Square’s Public Coming Out (With Earnings)
Whatever else one can say for Square, the firm is almost never boring for observers.
Going into its first public earnings report, Square managed to pull off some solid results, putting investors minds at collective ease. That ease translated into a 3 percent share price pickup in after-hours trading. That pickup leveled off at around $12 a share, well above the all-time low of $8 but also behind its high north of $14 a share.
By the numbers, the high-profile payment firm clocked $374 million in revenues, which was a sight better in the fourth quarter of 2015 than a year ago, with 49 percent growth year to year.
Net loss of about $0.20 per share came in above the $0.10 forecasted, but clearly, eyes were on the top line and a loss is to be, and was, expected on continued investment in the firm’s operations.
The actual red ink was $48 million, up from $37 million last year. Losses lower than expected — yay!
Adjusted earnings were $12 million for the year (which strips out non-recurring items), well over the $7 million projected by The Street. New equipment pre-orders seem decent, at 350,000 at quarter’s end. Square’s revenues from Starbucks payments came in at $47.1 million, up 29 percent year over year..
Square has been busy. The firm processed $10.2 billion in global payments, which was up 47 percent from last year, and made $299 million from its core business, which was up almost lockstep in terms of percentage growth year over year, to 45 percent.
But it may be the “other” businesses that garnered the most attention during the firm’s inaugural call with investors. Those businesses include add-ons to the core processing business and include Caviar (food delivery), Appointments and Payroll. Square Capital also made headway as well, with $150 million in cash advances made in the quarter (the firm earns a fixed fee from each cash advance).
Why EMV Is Killing Gift Cards
While many possible problematic effects were named when the EMV rollout was first proposed and pursued, some favorite topics included slowing things down at checkout, confusing customers and pushing fraudsters online.
What no one seemed to mention was stopping gift cards in their tracks and what the change in security might bring to them — probably because no one thought of it.
Until it happened.
It is apparently getting harder to get a gift card out there, as retailers are making it harder to buy them.
Why?
According to The Wall Street Journal, new credit card rules have put retailers on the hook for fraud when customers use stolen cards to buy gift cards, which means they have changed the way they handle them.
Some have started requiring cash-only purchases of the cards, others have cut them down to smaller denominations, others have put limits on buying multiple cards and some have just dispensed with selling them altogether.
Consumers are expected to load $651 billion onto prepaid cards this year, a 57 percent increase from six years ago, according to Mercator Advisory Group.
About half of that comes from “open-loop” cards branded by Visa, MasterCard or American Express, which are not linked to any particular retailer.
Unfortunately, criminals love gift cards as much as consumers do and love to buy them up with stolen credit cards.
In the past, retailers would deal with that because they weren’t on the hook for that kind of fraud.
With the new EMV rules, they now are, unless they’ve already upgraded their POS to EMV.
“Gift cards are a challenge,” said Mallory Duncan, general counsel at the National Retail Federation.
Grocery stores, small businesses and gas stations in general have been slow on the EMV front, though gas stations do have additional time. This has made them more vulnerable to gift card fraud.
According to Greg Ferrara, SVP of government relations at the National Grocers Association, small chains are now reviewing gift card policies, as the trade group has seen a big uptick in fraud of late.
So, what did we learn this week?
Expectations are an interesting thing. American Express, one might have expected, was simply too blue chip to ever really risk disappearing. One might have expected Square to disappoint in its first earnings report given its rocky road to going public. And one might have expected that something as popular as gift cards would always be available.
On the upside? You might also expect Innovation Project to be awesome. And, on that count, anyway, reality will proudly live up to your expectations.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More