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Why Apple and Goldman Can Afford Apple Card (When Others Can't)

Chris Hill, The Motley Fool

In this episode of MarketFoolery, host Chris Hill chats with senior analyst Jason Moser about some recent market news. Two aptly named payments companies -- Total System Services (NYSE: TSS) and Global Payments (NYSE: GPN) -- have decided to merge. To be determined: whether regulators bless the happy union.

Apple's (NASDAQ: AAPL) Apple Card didn't spark much enthusiasm with investors, and it turns out it didn't spark much enthusiasm with Citi (NYSE: C), either -- the bank apparently backed out talks about the card. So why did Goldman Sachs (NYSE: GS) take the bait? Plus, Facebook (NASDAQ: FB), for some reason, thinks that offering a Facebook cryptocurrency is a good idea. Tune in to find out more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 23, 2019.

Chris Hill: It's Tuesday, May 28. Welcome to MarketFoolery. I'm Chris Hill. Joining me in studio, Jason Moser. Thanks for being here! 

Jason Moser: Hey, happy to be here! 

Hill: For those who listen to Industry Focus, those folks know that Jason hosts the Monday episode about financials. There was not an episode yesterday because of the Memorial Day holiday. It's good that you're here today because this is going to be a finance-heavy show. There is a lot going on in the war on cash, we're going to get to that. We have a little bit of entertainment news to get to as well. 

Let's start with the merger, the deal of the day, a merger of two payment tech companies, Global Payments and Total System Services, two companies that appear to have gone out of their way to stick with really boring names. This is an all-stock deal. Tell me what you think of this one, because among other things, this strikes me as a deal that's probably going to catch the eye of federal regulators, just because these are two companies that are around $20 billion to $23 billion. This is the proverbial merger of equals. Global Payments making the offer. They're a company that's grown over time through acquisition. This is their biggest.

Moser: Global Payments was a company that I dug into a number of years ago, if you remember, we were doing those rising stars portfolios for fool.com. Global Payments was a business that caught my eye because of that payments space. These are businesses that are really in the merchant solutions, merchant services, payment processing side of the business. Boring names for really what are pretty boring companies, but they do serve a distinct purpose. If you are a shareholder of either one of these businesses over the last five years, then you've been very happy. Your shares have appreciated considerably over time. That's all hunky-dory. Now, a lot has happened in five years. The competitive landscape has changed a decent bit. So I think that it makes sense, at least from the perspective of consolidation, bringing two companies that do similar things together to become bigger in the face of a competitive landscape, with companies like PayPal and Square, trying to change that that payment cycle, so to speak, that entire transaction. It's really difficult to get a grip on how many players and the roles that they play, but they all do have a little spot in there. I think that this merger is partly to protect that. 

If you look at both companies' top lines, though, and earnings numbers, you can see they are running into some kind of brick wall, both of them. And I think that's probably where the concern should be for investors today. The merger makes sense. When I look forward, I don't know that I'd put these two companies or this one combined entity up at the top of the list. 

But, I tell you, I was at a banking and finance conference a few weeks ago. I know, super exciting. Everybody's just on the edge of their seat waiting to understand what I took away from it. 

Hill: [laughs] Also, everybody's jealous. 

Moser: [laughs] It was interesting to see, we had an attorney from the FDIC there speaking. It was notable that technology was really the buzzword. I mean, that's where everybody is really focused on how technology is changing the way payments are being processed. So, for these two companies that have played a role in what was, I think they're trying to turn their businesses into what will be. That's what this merger ultimately hopefully accomplishes for them. But, acquisitions are not easy. 

Hill: They're not easy. When I say this is their biggest acquisition, this is by a factor of six or seven. This is the biggest acquisition they've made. All of the integration that comes with that, not just the technological integration, but also the human resource integration, for a company that came out very quickly this morning and said, "Yep, we expect this deal to close later this year," this is absolutely going to be something to watch. To your point, I think if you own shares of either of these companies, you've been happy for the past few years. And I don't think there's anything about this deal that screams "pull the ripcord and get out now." But I think you definitely want to pay attention to, does the acquisition in fact close later this year? And what, if any, speed bumps do they hit along the way? To your point, they need this to go as smoothly as possible, obviously, as any company making an acquisition wants it to go smoothly, but they have real work ahead of them. It's different than the work that they've completed to this point.

Moser: Yeah. Whenever you see acquisitions this large -- that really is something to keep an eye on. I do think that regulators will let it go through. I think that consolidation in this space is just something that has to happen. If you remember, at the beginning of year, we saw First Data and Fiserv, that merger there. I think that this is just another sign of the direction where things are going. But anytime you're incorporating a big company into another big company, there will be the requisite cost savings that ultimately come from it all. But it is just a lot of work on the front end to make all of this stuff happen. We're talking about two businesses that are already facing some challenges there in regard to organic growth. Investors, when we talk about organic growth, that's what we mean. We're talking about a business that's able to grow on its own versus a business that has to grow via acquisition. Acquisitions are fine until they're not. When you start seeing signs that businesses are having a hard time making those acquisitions work, incorporating the cultures, the business models, that can really impact the returns on shareholders. I think that's what we have to keep an eye on here. 

Hill: Back in March, Apple unveiled its new credit card with Goldman Sachs. Now comes a report that Citigroup was one of the banks involved in advanced talks with Apple for the card. Citi backed out of the talks for what sounds like a really good reason, which is basically, they weren't convinced that they were going to make money off of this card. 

Moser: They're not the only ones. When Apple made this announcement, unless you were just a total Apple fanboy, you stepped back and think, "Okay, Apple Card, what's really the deal there?" Ultimately, unless you're an Apple enthusiast, you don't really get the sense that Apple Card is some great idea. It's another decent product in a sea of alternatives. I mean, any card company can get out there and offer any type of incentive for you to carry their card. That's what these companies do day in and day out. From Apple's perspective, I don't really expect much from this at all. 

Now, from Goldman's perspective, I do think this makes a lot of sense. Part of that is because Goldman is trying to make that pivot over toward more of a personal finance side of the business. Traditionally they've been very institutionally oriented. They're trying to change that. One of the signs of the end is the Goldman Sachs Marcus that they've introduced. For those who aren't familiar with Marcus, Marcus is something that focuses more on the consumer side of finance and debt solutions. Interestingly enough, we had an interview with some folks from Goldman Sachs on April 29's episode of Industry Focus. You can listen to that and get a better idea of what Marcus is all about and what their plans are. So, I understand from Goldman's perspective, wanting to do this.

I don't think this is much, if anything, that impacts Apple's business whatsoever. Apple Pay is not a very profitable driver today. It brings in a little bit of money, I guess. But that's a little bit nebulous because they don't really break out that stuff. For Goldman, I think it's one step in a bigger move toward focusing more on personal finance, becoming a little bit more relatable to the consumer. 

Hill: Apple has all the money in the world on their balance sheet. 

Moser: They do.

Hill: They're fine. Goldman Sachs has never had trouble, really, making money. 

Moser: They have not.

Hill: Do you think that the approach that these two companies are taking with this is, in large part, a super-long play? In the case of Apple, it's, "We can afford to lose money because we're Apple. Also, somewhere down the line, and by that, I mean 10 to 20 years down the line, we'll be able to make this much more profitable than it is right now." And in the case of Goldman Sachs, obviously, to your point, they're looking to get more into personal finance. They've got other ways of making money. Clearly, they were not scared off in the way that Citigroup was, in terms of, "Oh, we might actually lose money on this deal." But if their approach is, "We're taking a super-long play into personal finance," then they can afford it. 

Moser: Yeah, I think for Goldman Sachs, it's clearly just a matter of strategy. They have this long-term vision of becoming more relatable to the consumer and playing a bigger role on the personal finance side of the equation. This for them is, as we like to say, a little bet on something that could pay off down the road in one way or another. I don't think it necessarily pays off in the form of a robust Apple credit card business. I think Apple Card probably does OK for the people who are big Apple enthusiasts. But, again, you live in this world, the race is to the bottom when it comes to these cards. It's about bringing these costs down and offering people incentives, which plays out on the business that's offering all of those incentives. So, you're right, Apple can pay for those incentives because they have all the money in the world. For Goldman Sachs, it's really not a material bet cost-wise. I don't think it's one where they're looking to make money as much as they're just looking to build some credibility, some trust in the eyes of the consumer so that as they grow out this Marcus offering, it's one more notch in the belt. 

Hill: Well, if you're not excited about the Apple credit card, I know you're going to be excited about this. Facebook is finalizing plans to launch its own cryptocurrency. We can expect more details from Facebook later this summer in advance of the testing that they plan to do this fall. What in God's name is this?

Moser: I think that's the fairest question. It's a little bit unclear as to what ultimately, they're trying to do. Some people are asking, is this a Facebook cryptocurrency like bitcoin-style offering? Or are they trying to build some digital payments network that competes with the likes of PayPal and Square and whatnot? As it stands, from what it looks like, at least, they're trying to build their own digital coin, Facebook Coin, or Global Coin, whatever they're calling it, that ultimately gives the unbanked and underbanked consumer choice or options. 

To be very clear, that is a very relevant market opportunity. There are 65 million or so adults here in the United States alone that would be considered unbanked or underbanked. There's a tremendous opportunity out there to help those folks in providing services that are low- to no-cost, and helping them manage their money in the face of what is becoming a cashless society more or less. 

The thing is, Facebook's not the only company, obviously, trying to do this. You've got Square, PayPal, Stripe; you've got Mastercard and Visa offering solutions as well. If you put all of those companies in a room along with Facebook, you say, OK, one of these is not like the other. One of them clearly stands out, and that's Facebook. Facebook's not the one that's been pursuing this market opportunity as the others have. 

It's not the first time they've tried something like this. They did try a Facebook Coin or some digital offering a number of years back. It ultimately didn't get any traction. We've seen bigger players like Amazon try to do the same thing. You have to give a real robust incentive for someone to want to convert their hard-earned dollars into a digital currency. I don't know that Facebook necessarily has the trust, honestly, of the consumer that would make this happen in the long run. I don't understand why anybody would say, "Yeah, I'm happy to convert my dollars over to Facebook coins." I don't know what else special you can do with that? 

Hill: Well, and if you think back two to three years, before the trust issues with Facebook really came to the forefront, before the Cambridge Analytica report, all that stuff -- you go back to three years, Facebook was talking about getting into banking, getting into some type of financial service. Maybe not becoming a traditional bank, but they were absolutely talking about that. You can almost draw a straight line from those conversations to the trust issues to someone at Facebook -- whether it's Mark Zuckerberg or one of his lieutenants -- saying, "OK, we're not going to be able to go with our original plan, but let's figure something else out." And here we are at a Facebook cryptocurrency. 

Moser: Yeah. It's one of those things where, you look at all of the different ways this could play out. From the consumer side, if you are someone in the United States who's looking to pay a friend of yours overseas, or send money to a family member in an overseas location, there are businesses that have been built to do specifically that. We talked about Xoom before it was acquired by PayPal. That's what Xoom, the remittance company, does. The entire business was built for that. We saw the challenges involved with building out that kind of a business. It's not like Facebook can just hit a switch and then be able to do that overnight. 

I could see where, perhaps, they could offer incentive for advertising customers to have some sort of a currency that's exchanged there, where they get some incentive to pay in a digital offering as they pay for their advertisements? Perhaps they're looking for that data that shows what people are spending their money on, and where, so that they can then ultimately serve up more relevant advertisements. I don't know this is ultimately something that is meant to be a big driver of revenue for the business, because, as I said before, generally speaking, this is a race to whittle down the costs of moving money around. 

It's worth noting, we talked about this a while back, I asked some folks on Twitter, I put a poll out there, just to get a general idea of, was there a strong feeling one way or the other? And I asked, "Would you migrate your payments behavior over to a Facebook pay platform if it was an option?" Three-thousand-plus votes. Ninety-five percent said no way. Now, I'm not saying that means they can't do it. But what I'm saying is, there is a problem here that they're going to have to overcome, beyond the technical and the regulatory issues that come with moving money around the world. And it's one of trust. I don't know that Facebook necessarily has the identity or the trust of the consumer to really be able to make meaningful inroads in the side of the business. When it comes to crypto, I'm not the biggest crypto guy in the world, I wonder what would make a Facebook crypto better than Bitcoin. I don't know what Facebook thinks they have that means they could do this better. I don't know that necessarily the biggest network wins here. The whole world isn't trading crypto. It's a very, very small cross-section of the population that's actually trading that stuff. There are a lot of hurdles. It's not to say they can't make some sort of progress there, I just tend to feel like if they wanted to get in the payments space in some way, shape, or form, it would be way easier for them to partner up with companies that already do it really well and have the trust of the consumer.

Hill: Somewhat to my surprise, Aladdin was No. 1 in the box office over the weekend. Very much to my surprise, and I cannot believe I'm the only one who's surprised by this, it was overwhelmingly No. 1 at the box office, to the tune of $112 million domestically. Part of that is because we had Nell Minow on Motley Fool Money last weekend, and I asked her a bunch of questions about the summer movie season, and one of those questions was, "What's a movie to skip?" A couple of years ago, I asked her that, and she said, "You can skip The Mummy with Tom Cruise." And I, and many, many, many other people did skip The Mummy with Tom Cruise. And this year, she said, "Yeah, it's Aladdin. It's not going to be that good."

Moser: People don't care.

Hill: People don't care. That's the thing. We were talking this morning about the Rotten Tomatoes score. You look at the critics, the critics score is I think 58%. The audience score is 94%.

Moser: Isn't that always the way, though? The professional critic goes in with a framework. They go in with boxes that need to be checked. The consumer, the everyday Joe Schmo like you and me, we go in just looking to be entertained. If we walk away with a smile on our face, I mean, I'm not really going to care about the segue from act one to act two, right? It's just a matter of, did the movie make me smile? I mean, listen, I'm going to get a little bit graphic -- you won't have to get the bleep button out here or anything. But, it strikes me that we're at a point with Disney where we were with Apple a number of years ago. And with Apple, I said, they could take a dump in a box, stamp iTurd, and sell 5 million of them, no question. They wouldn't even have to say anything. People will buy it because it's Apple, it doesn't matter. I feel like Disney's at that point. They can pretty much make any movie they want, stick it out there, and it's going to be make like $500 million, at least, if not a billion. It just doesn't seem like it matters anymore. And it's because they have this ability to tell a story. You made the point a while back, too, that beyond that, and the IP, they have this ability to attract the greatest talent on the directorial and production side. And that really is, I think, a big difference. 

Hill: It is, although, a couple of caveats to that. One is, just from a profit and loss standpoint, if you're a Disney shareholder, and I am, I think you are as well?

Moser: My kids are.

Hill: The movie still is not profitable. It needs to make more money. It's still not quite profitable. The other thing is, and I say this having interviewed Nell Minow for a decade now, Nell has a little bit of a soft spot for Disney. When Nell gives a movie review, I usually discount it like a half grade. If she says a movie is an A+, I think to myself, "Okay, for me, it's probably an A-." So, the fact that she said -- I mean, I was factoring all that in. So I thought, "Wow, if she thinks Aladdin is one to not spend your hard-earned dollars on going to the theater for, then there are going to be some critics out there who are ripping this thing." But I think, to your point, most people are pretty binary when it comes to movies. It's like, am I entertained, or am I not entertained? And I think the difference between something like this and something like John Carter is that this is more of a known entity. 

Moser: And it's got Will Smith. And I don't say that lightly. My daughters really want to go see Aladdin, and one of the big reasons is because Will Smith. They think he's funny --

Hill: They probably know the music as well. 

Moser: Right. They know the music, they know the story. It's Disney, they love that stuff. And I think they're at that age where the animation perhaps isn't really what they're looking to go see at the movies these days. Sometimes it works out. But I think this move into the real-life adventure is working out. I mean, it's probably better for some stories than others. Cinderella, I thought it worked out really well. I haven't seen Aladdin. I suspect I will at some point. I'll give you some feedback there. The one I actually had been really taken by that I want to see and will see is Dumbo. I never really cared for the animated movie. But man, the Tim Burton real-life version really seems cool from every angle. I definitely want to see that one. 

Hill: To bring it back to the stock, going into this weekend as a shareholder, I thought all right, this is going to be a speed bump, but that's OK, because we've got Toy Story 4 coming, we've got another Star Wars movie, Frozen 2. And it's like, wow, if this is going to turn out to be profitable, this is really shaping up to be a great year for the studio side of the Walt Disney Company and setting 2020 up to be a really tough comp. 

Moser: And we're going to see how well they are able to monetize this stuff beyond just the cinemas. They're going to push this stuff into homes. They already push it through parks. It's that same old thing we talk about with Disney. They do such a good job of just perpetuating this monetization of these properties. It seems like it never ends because it in fact never ends. And when you and I are older and greyer than we already are, and hopefully we're grandparents, maybe I get you out, we play a round of golf, we have a drink after and we're talking about this, and thinking, "Remember 20 years ago? It's just been more of the same." That's my bet to you. I think in 20 years, it will just be more of the same. 

Hill: I'm in for all of that except for the actual golf. 

Moser: Well, you can drive the cart.

Hill: I'll drive the cart, there you go. Jason Moser, thanks for being here!

Moser: Thank you!

Hill: As always, people on the program may have interest 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. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN, PYPL, and DIS. Jason Moser owns shares of AMZN, Apple, MA, PYPL, SQ, TWTR, V, and DIS. The Motley Fool owns shares of and recommends AMZN, Apple, Facebook, MA, PYPL, SQ, TWTR, V, and DIS. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.