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PayPal is 'the grand-daddy' of the digital banking space: Analyst

Lisa Ellis, Partner at MoffettNathanson, a division of SVB Securities, joins Yahoo Finance Live to discuss PayPal earnings, Block earnings, and the outlook for the digital banking space.

Video Transcript

- Some of the big movers in today's session are crypto and payment services. Coinbase, PayPal, and Block all moving after reporting earnings. We want to bring in Lisa Ellis, partner at Moffett Nathanson, a division of SVB Securities. Lisa, it's good to see you. You cover all three of these companies. So you're the perfect person to have on to ask about this. Let's start with the movement that we've seen in Block. We saw shares really take off today following the results that we got last night, closing up just over 10%. In a note out today, you wrote that after a wild ride over the past 2 and 1/2 years, Block's business is emerging from the pandemic stronger than ever. Why?

LISA ELLIS: So in a couple of ways. The Cash App business, I'd say, is the real standout. That's their digital bank. They reported yesterday they're up to almost 50 million monthly active users in that product and about 18 million folks that use it like a primary bank account. Just for a point of reference, like a JPMorgan or a Citi have about 30 million mobile bankers. So this is like more than half of where they are. Those are all consumers.

What happened during the pandemic, when banks were closed, right, and people were home, they downloaded and adopted something like Cash App as a form of digital banking. And Block's just done a fantastic job of building an ecosystem around that and really, really pulled in those consumers. That product literally was almost zero five years ago and is now contributing more than half of the gross profits of the company.

- So Lisa, in that digital wallet wars survey that you guys have, what stood out to you in terms of the demographics and, really, the opportunities for growth there?

LISA ELLIS: Yeah. It's true. What's interesting is that the digital banks skew younger in terms of cohorts, as you might imagine. But otherwise, there's no particular groups that stand out. They're not lower income. Sometimes, there's a perception that the digital bank users are more unbanked. They are actually not. They're very just mainstream. These are just simply individuals that are very mobile first and prefer to do all aspects of their life through mobile.

But what Cash App and what Block are really doing there is they are trying to add services to move their way upmarket, adding investing services, adding lending products to migrate their way up to a more affluent consumer that has higher spending power, which is how they generate a lot of the revenue for those products.

- Lisa, how are you looking at Block's crypto part of its business? Because revenue from Bitcoin this quarter, 1.76 billion. That was off about 3% from a year ago, slightly missing the Street's expectations. Is this a risk, do you think, for the company, given the activity, or lack really thereof, that we've seen in the crypto market as of late?

LISA ELLIS: Well, I mean, it's not a risk in the sense that it runs through the income statement in kind of a funky way. So it shows up as a very big revenue line item and a very big cost item. But you really just net those out and it's only a couple percent contribution to the gross profit of the company. But it is a very big engagement driver and usage driver. Like a reason people download these apps and really engage with the apps daily will be if they're very active in crypto.

And so when we're in a lull period like this, Block has to find other ways to engage consumers through other products, like, for example, they bought Afterpay, one of the big buy now, pay later players, who has very strong digital shopping services. And they're starting to integrate some of that sort of shopping and kind of deals and promotion type of services into the app too.

- So Lisa, obviously then talking about PayPal, which is one of the first names in this space, clearly losing market share to some of this competition here. What is the growth story then for PayPal at this point? They've also tried to add on some services as well.

LISA ELLIS: Yeah. PayPal is in-- it's true. They're in a challenging position in the sense that they're the granddaddy of this space. They've been so dominant for so long that it's hard for them to maintain that level of a leadership position when you've got Apple Pay and you've got the players like a Cash App or a buy now, pay later players kind of nipping away at their heels.

So what PayPal has done-- I mean, a part of their offering I would highlight is that they bought a company called Braintree a number of years ago, which is the big competitor of Stripe and Adyen. So more on the merchant side. So providing the merchants with a wide set of services. The digital wallets, of course, and the check out button, but also overall payment processing, things like loans for merchants.

So they're sort of steering a lot of their business more toward the merchant side of the equation where they compete, like I said, with some of these big high growth players like an Adyen or a Stripe.

- Lisa, let's move over to Coinbase because we're seeing the stock pop today. Closed in the green, well in the green. Yet the company reported a wider loss. Revenue was off 54%. Shares down nearly 80% this year. Yet you have an outperform rating on the stock. Why are you bullish on this name?

LISA ELLIS: I love Coinbase. I mean, this is a long-term play. There's no question. And the reality is we're likely-- historically, crypto winters have typically lasted about two years. And we're only about six or nine months into this one. So we've probably got a ways to go if history is any indicator. So there may not be, arguably, that much urgency. But in terms-- I think of Coinbase as a very unique asset, as a large cap publicly listed player in crypto and way to play crypto.

They're very differentiated in sort of the crypto infrastructure space. You're starting to see them doing these partnerships with a BlackRock or with a Google, where they're sort of the crypto inside, so to speak, where they're providing crypto onboarding capabilities, digital asset storage, the ability to convert fiat into crypto and creating that-- they're the plumbing or the rails in those applications.

And it's that aspect of their business that I get really excited about. For example, in this quarter, yes, their kind of core transactional revenues are down significantly because just overall crypto trading activity is down, but their subscription and services businesses, which are all of these infrastructure type of services, were up over 40% quarter on quarter-- that's sequentially-- and are now almost 1/3 of the revenues of Coinbase. And that's the piece I'd really be keeping an eye on over the next couple of years as it becomes a larger part of this business.

- Coinbase certainly growing with those partnerships, growing its ecosystem. A big thank you to Lisa Ellis. Great to see you. Have a wonderful weekend.