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Apple-Goldman Credit Card Is Far From a No-Brainer

According to a report in the Wall Street Journal, Apple (NASDAQ:AAPL) has teamed up with Goldman Sachs (NYSE:GS) to create a credit card that will be part of a new iPhone app. The reason? AAPL had gotten frustrated dealing with different banks for services like smartphone leasing and digital wallet processing.

Apple-Goldman Credit Card Is Far From a No-Brainer
Apple-Goldman Credit Card Is Far From a No-Brainer

Source: Shutterstock

As should be no surprise, top banks like Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) pitched hard for the deal. But in the end, Apple wanted a partner that could expand into other lucrative areas, like wealth management.

No doubt, the fintech market has tremendous potential and looks to be a secular trend across the globe. Based on an investor presentation from PayPal (NYSE:PYPL), the total addressable market is a whopping $110 trillion! And a critical part of this will be smartphones. So yes, this should be very good news for AAPL stock.

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The partnership also has some other clear advantages. By pairing up with GS, AAPL will greatly reduce the need for handling regulations or building the core finance infrastructure. None of this is strategic to AAPL. As for GS, a partnership with AAPL should supercharge its foray into consumer finance. Note that the iPhone has 1 billion users.

It’s a win-win, right? Well, kind of. There are actually some nagging risk factors as well – which may mean that the impact on Apple stock could be disappointing.

First of all, GS has only a short history with consumer finance offerings. It was in 2016 that GS launched Marcus, an online platform for unsecured personal loans. The unit has gone on to add more products like high yield CDs, home improvement loans, and debt/credit consolidation.

Next, the credit card market is intensely competitive. The major banks in this category spend heavily on TV and digital advertising – creating top-of-mind brands.

And yes, a popular way for people to find credit cards is to go to online comparison sites like LendingTree (NASDAQ:TREE). This means that a credit needs to provide compelling features and rates that stand out from the noise.

It also seems like a good bet that other mega tech operators will move into the credit card space, such as Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG).

Here’s how KeyBanc analyst Josh Beck puts it: “While there is clearly opportunity for Apple to play in financials, news and video, there is also significant competition and much greater room for Apple to mis-execute. This increases risk to the brand that we believe offsets the profit potential based on details we have seen so far.”

AAPL Stock Price and the Credit Card Business

There are millions of loyal fans who will love to have an Apple credit card. But this only represents a minority of the user base. Consider the company’s payments business. Despite its convenience of being loaded on the iPhone, the activation rate has been only about 25% or so in the U.S. and the annual revenues are under $400 million, according to Loup Ventures.

In light of this, why wouldn’t a credit card have a similar growth path? Unless there is something unique, it probably will be more of a niche play.

When it comes to Apple stock, the two main drivers are the iPhone and services. But as seen in the past few quarters, these segments have been a mixed bag. The iPhone — which represents a majority of revenues — appears to be a mature business and the growth from services has not been enough to compensate for this.

And unfortunately, a credit card will likely be just a rounding error when it comes to the top line.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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