What Happened: The actively managed ARKF is the king of exchange-traded funds when it comes to Square exposure, allocating 12% of its weight to that fintech juggernaut, more than any other ETF. PayPal is the ETF's 11th-largest holding at a weight of 3.26%.
That's a favorable trait at a time when Venmo and Cash App are posting growth rates traditional banks could only dream of.
“PayPal’s Venmo and Square’s Cash App have amassed roughly 60 million users organically in the last 10 and 7 years, respectively, a milestone that took J.P. Morgan more than 30 years and five acquisitions to reach,” according to ARK Invest research.
Why It's Important: With ARKF up more than 71% this year, it would be easy for investors to assume they've missed the “easy money” and the big growth here. Good news: Digital wallet growth data suggest otherwise.
“According to ARK’s research, during the next five years the number of US Digital Wallet users will more than double to 227 million, generating a market capitalization of roughly $830 billion if investors value each user at roughly $3650, the average valuation per US bank customer at year-end 2019,” notes ARKF's issuer.
Investors are showing a willingness to back ARKF. From its March low to July 1, the fund more than doubled. Market participants proceeded to allocate almost $380 million to the fintech ETF in the third quarter as it gained more than 14%.
Benzinga will be holding its annual Benzinga Global Fintech Awards, a day of dealmaking, networking, and recognition in the financial technology space, on Nov. 10, 2020.
What's Next: A case can be made that digital wallets like Cash App and Venmo are actually undervalued given the low overhead and superior margins these platforms offer relative to traditional banks.
“In our view, $3,650 is quite a conservative valuation for Digital Wallet users given banks’ poor track records in cross selling their services,” notes ARK.
The dept of products Cash App and Venmo can offer users could allow Square and PayPal to wring more value from customers than standard banks do.
“Digital Wallets should be able to provide and extract more value per customer as we believe they cross sell more services successfully thanks not only to a more user-friendly experience but also to the convergence of their 24/7 data collection advantage and artificial intelligence,” said ARK. “By the end of this year, we expect the number of J.P. Morgan Chase deposit accounts to total approximately 60 million while Cash App scales to 59 million Annual Active Users (AAUs) and Venmo to 69 million.”
Disclosure: The author owns shares of Square.