If you’ve spent time in China over the past 5 years and tried to use a credit card, you may have received a quizzical stare. If you tried to use cash, you probably failed. Nearly the entire consumer economy is predicated upon mobile payments and scanning QR codes on WeChat or Alipay. It’s estimated that in China ~583 million people used mobile payments in 2018 and it’s home to ~60% of mobile payment users globally. The transition towards a cash-less society is well underway and large tech firms, payment companies, and incumbent financial service companies are vying to become the WeChat / Alipay of the West and for good reason:
· Payment Volumes- According to the People’s Bank of China the volume of domestic mobile payment transactions reached 277.4 trillion yuan ($41.5 trillion) in 218, up 28.0x versus 5 years ago. It’s estimated that WeChat & Alipay dominate more than 90% of the mobile payments market in China
· Engagement- WeChat’s MAUs surpassed 1.0bn in 2Q19 and the ~80% of users spent >10 minutes per day on the app. The number of Alipay users is estimated at >850 millions.
· Super App- As we noted in our FinTech decade ahead projections these apps are more than just payment apps nearly ½ the WeChat homepage is dedicated to Ecommerce, travel, gaming, gifting, while the other half is left for a wide array of financial services ranging from bill pay, to wealth management, and P2P transfers.
NYU Professor Scott Galloway (@profgalloway) has written an open letter to Twitter’s board discussing a no-confidence vote regarding CEO Jack Dorsey and other directors, given Jack’s dual CEO roles at both TWTR & SQ. Galloway highlights very relevant factors pertaining to TWTR’s underperformance and some valid concerns around governance. As opposed to removing Jack we think there’s a significantly more value accretive path forward for all shareholders; a merger between TWTR & SQ. On the surface it may seem as if you’re combining two businesses with limited synergies, however we think this pro-forma entity would have the best chance to create a “Super App” equivalent in the East within the confines of the current regulatory construct.
The Competition
WeChat and Alipay are bigger than every country in the world not named China or India and they just recently began a concerted effort to expand beyond South East Asia. You can name nearly every technological innovation throughout human history that has been able to reach the scale of these apps (telephone, electricity, radio, PC, TV, Cable, Internet, Mobile Phone, Facebook) and it’s not many.
So there’s no wonder that you’re see companies like FB, Apple, Google, Samsung, and PayPal all vying for this position, while countless startups have targeted the same thesis. Facebook has made several moves to position the business for this use case with the integration of payments across Messenger, WhatsApp, and Instagram, as well as their proposed launch of Libra. The hardware companies like Apple, Samsung, and Google have looked to integrate their payment functionality into messaging allowing users to send money to each other as simply as they can send a text. PayPal made it’s foray into P2P payments with the Venmo acquisition and is now looking for ways to monetize that highly engaged user base.
Despite this competition we think a TWTR / SQ union is in the best position to 1) Gain product market fit and perhaps most importantly, 2) Avoid regulatory scrutiny.
Background
What makes these Super Apps so powerful isn’t merely the payments functionality, it’s the fact that through these ancillary services they have become a part of the daily fabric of hundreds of millions of people. You’d be hard pressed to find another financial service app that people willfully engage with as frequently as WeChat and Alipay. Messaging has become a critical component of this daily engagement with the top 8 most popular mobile messenger apps (WhatsApp, Facebook Messenger, WeChat, QQ, Snapchat, Viber, Discord, Telegram) having >5.0bn monthly active users.
As Professor Galloway states, “Twitter has become an iconic brand and the global heartbeat for our information age. The only firms with the reach and influence of Twitter [are] Tencent, Facebook, and Google.” Now that we have world leaders (and aspirational world leaders) breaking news on Twitter its importance as part of the global fabric is difficult to question, despite the fact that there is there is “only” 145.0mn of what they call monetizable daily active users “mDAUs.” Twitters demographic skews wealthier, and more educated than other yet TWTR has been unable to monetize them at the rate of duopoly market leaders in advertising GOOGL / FB.
Strategic Rationale
A pro-forma Square / Twitter will have a vertically integrated payments processing system with unparalleled reach and intentional engagement. Imagine a super app with the TWTR feed, integrated with a Telegram / WhatsApp-esque direct and group messaging functionality, coupled with Square Cash’s payments functionality. Cash App’s ecosystem of differentiated products “allows customers to easily send, spend, store, and now invest money.”
Square Cash Currently Offers:
· P2P Payments
· Direct Deposits
· ACH Transfers
· Cash Card- A Visa prepaid card linked to the balanced stored in Cash App
· Cash Boost- Customers receive instant discounts when they make Cash Card purchases at designated merchants.
· Equity Trading- Square recently launched fractionalized investing in US equities for as little as $1.00 through their broker-dealer partner DriveWealth.
· Bitcoin Trading
Square Currently Offers:
· Developer Platform
o Commerce
o In-person payments
o Mobile Payments
o Online payments
· Hardware
o Contactless & Chip Reader
o Magstripe Reader
o Square Stand
o Square Register
o Square Terminal
· Managed Payments Solutions
· Software
o Square Appointments
o Square Dashboard
o Square Loyalty & Marketing
o Square Payroll
o Square Point of Sale
o Square Invoices
o Square for Retail
o Square for Restaurants
o Square Virtual Terminal
o Weebly
· Square Capital- facilitates loans to qualified Square sellers based on current payment and point-of-sale data.
Twitter Currently Offers:
· Twitter- a platform for self-expression in real time from breaking news and entertainment, to sports, politics, and everyday interests, Twitter shows every side of the story
· Promoted Tweets
· Promoted Accounts
· Promoted Trends
Pro Forma Features to Add:
· B2B Payments- Allow businesses to pay each other using Cash Tag and / or Twitter Handle
· Messaging- TWTR and Square would need to create the concept of direct and group messages analogous to those in WhatsApp, WeChat, and Telegram as an extension of Twitter DM’s.
· POS Lending- Given Square Capital’s lending history coupled with their POS technology that could offer a competitive service to Affirm for POS lending. Square Capital uses PoS data for loan applications and provides cash the next day.
· SMB Payments- Facilitate SMB payments for Square Cash small businesses
· Stock Trading- Integrate stock trading into the core TWTR app
· Quant Data- TWTR has significantly under monetized it’s data for quant investors so much so that Bloomberg has integrated TWTR news & data into a number of different product offerings. The ability to couple trade data + market sentiment data + purchase data would make the pro forma entity a treasure trove of unique and proprietary data for Quant Funds.
If we think about that breadth and diversity of product offering the combined company has the look and feel of the beginnings of a Super App. Users have a content center with millions of businesses already on the platform, PoS technology, P2P payments, equity trading functionality, and lending options. This could be the gateway towards broader wealth management with integration into PFM tools and the first platform allowing for autonomous finance or self-driving money. This could be done in a super-app format with integrations into third party robo-advisors (e.g, Schwab, Betterment, Wealthfront) or offer their own. Cash app is slowly expanding product offerings and we would expect that to continue to be the case, which could be accelerated with integration into TWTR’s valuable user base.
User Base
Twitter discloses the metric “monetizable DAU” or mDAU which is the percent of users that can be shown an ad. During 3Q19 that number was 145.0mn. Square doesn’t frequently disclose its userbase but in the last updated from 4Q18 they highlighted 15.0mn+ monthly active cash app customers that have at least one cash inflow or outflow. While there are surely some overlapping accounts this is a significant user base from which to launch a vertically integrated product on.
Relative Performance
While professor Galloway’s valuation metrics were off his point on valuation disconnect and underperformance hold true. TWTR has underperformed the S&P by 64% since Jack came back as interim CEO and the NASAQ by 103%. This underperformance should be captivating enough for an activist investor to take hold (e.g., Elliott, Third Point, JANA, Corvex). If we look at Square, it’s outperformed the market by over 450% since IPO (which was two months post) and NASDAQ by 500%.
If we look at the performance between TWTR & Square below is a synopsis of the relative stock trading ratios over the past 6 months, 1 year, 2 years, 3 years, and since IPO.
Hypothetical Structure
If we look at the trading multiples (below) between SQ / TWTR, coupled with growth prospects we can see an all-stock transaction in which SQ acquires TWTR at a ~25% premium to current levels or a 0.563 ratio. This is in line with the 6-month average and a premium to the past 2 year trading multiples and would provide TWTR shareholders with just over 50% pro-forma ownership.
Trading Multiples
Given the operating leverage for payment companies, TAM, and growth inside and ex-US payment companies have been trading at significant premiums to the market and even high growth TMT peers and Square is embolic of this trading at ~50.0x ‘20E EBITDA & ~70.0x ‘20E EPS vs. TWTR at 14.5x / 31.8x respectively. ‘’ Without given any upside for the incremental growth associated with the Super App concept and trading ta a blended multiple we can support a pro-forma PT of Square in the mid-to-high $80s which would be 50% upside for TWTR shareholders.
Pro Forma Valuation:
