Is PayPal’s CEO Delivering? | The Motley Fool

In this podcast we discuss topics including:

• PayPal’s earnings and why a drop at a specialty insurance company could be a buying opportunity for investors.
• What to do before you meet a financial advisor, and some questions to ask in an initial meeting.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on April 30, 2024.

Ricky Mulvey: Everybody loves the comeback story, except when it slows down. You’re listening to Motley Fool Money. I’m Ricky Mulvey, joined today by Matt Frankel. Matt, thanks for being here.

Matt Frankel: Thanks for having me. I’m excited too. We’re in my favorite part of earnings seasons right now.

Ricky Mulvey: Why is that?

Matt Frankel: It’s all the companies that I follow like the two we’re about to discuss today, but this week it’s crazy. I’m going to be working till 10:00 P.M. everyday this week.

Ricky Mulvey: There you go. The reason why we’ve called you here, we got PayPal and Kinsale, which are two companies you follow closely and maybe for a listener, one of them is a lot more known than the other. So let’s start with PayPal, which reported this morning. This was the third call for the new CEO, Alex Chriss. He’s still early in his tenure, but do you think he’s starting to deliver on that promise he made in the first call to make PayPal a much more focused and profitable company?

Matt Frankel: The short answer is yes, but it’s also important to know that Alex Chriss isn’t just the only new part of the team. PayPal literally got rid of its entire C-suite. Alex Chriss started his tenure in September and everyone else on the key leadership team is newer than him. Some started in January of this year, some are just being appointed now. I think they just added another key board member this past week. It’s a really interesting time. It’s really rare that a company of this size and this dominance at what did those just like wipe the slate clean and brings in a totally new management team. But on the efficiency question, absolutely. This is what was the big surprise to me in the quarter. There were two big surprises, this was one of them, is that PayPal’s revenue grew by 9% year over year. It’s earnings per share grew by 27% year over year. Anytime you see earnings from an already profitable company growing that much quicker than the top line, they’re doing something right when it comes to efficiency.

Ricky Mulvey: They’re also doing hundreds of billions of dollars in payment volume, so those percentages become a little bit harder to come by. Chriss is an outspoken CEO. In this call, he took some pot shots at the previous administration of PayPal for essentially their relationships with small to medium sized businesses. He called out Zoom for being a company in stagnation. Usually, you hear leaders say, this is a company we want to be like. We want to be like the Taiwan Semiconductor of artificial intelligence, and in this case you have Chriss saying, look at Zoom, they stagnated and that’s exactly what we don’t want to be like. He’s got this more, I would say, deliberate, straightforward approach than you see in a lot of CEOs.

Matt Frankel: He came from the small and medium sized business world. He was CEO of Intuit, if you’re not familiar, which is the company behind QuickBooks, which is the small business accounting software package. It’s not surprising that that’s a key focus area of his. He’s absolutely right that PayPal just completely stagnated. The previous management strategy was generally that we’re going to keep growing our user-base forever and ever until every person in the world uses PayPal. That clearly didn’t pan out. Then they had a disjointed strategy. I don’t know if you remember when they were going to acquire Pinterest.

Ricky Mulvey: I’ve heard the stories.

Matt Frankel: Then just scrapped it because everybody who heard it was just like, why? It was just really a disjointed strategy. They abandoned their core growth strategy, which like you said, small and medium-sized businesses, and were just throwing spaghetti at the wall to see what sticks.

Ricky Mulvey: It has a couple of powerful tools over at PayPal, they didn’t need Pinterest. Let’s do a menu of topics of what was talked about in the quarter and then you can pick from the menu what stood out to you. Here’s a few of them. Number 1 is, Chriss is trying to grow the fraud prevention services, which Chriss called best-in-class, its key differentiator. They inked a deal with DraftKings for fraud prevention. There was a 21% increase in users on the Venmo debit card. It’s working on linking that to Google Pay and Apple Pay. I would say reporting thing that stands out to me is that PayPal is now reporting stock-based compensation as a part of non-GAAP metrics, which is going to change a lot of those comparisons, but gives a lot more clarity to those investing in the company. Hey, we got to stablecoin. How about that? PY USA, they’re hoping to eliminate fees on those cross-border transactions for users on Venmo. Then active accounts grew sequentially, which is a little bit of a reversal from recent trends. There’s your menu board, Matt Frankel, which would you like to order from?

Matt Frankel: Well, let’s start with the two different Venmo topics: that was the Venmo debit card and the stablecoin. Venmo has been an area that PayPal has struggled to monetize for a long time. It’s a big part of its payment volume. I want to say it’s roughly one-fourth of the company’s entire payment volume, which one-fourth of $1.6 trillion of annualized volume, that’s not nothing. They’ve really had a hard time figuring out the best ways to monetize that. The Venmo debit card is huge because they will get some take rate from each transaction there. It’s not just like if I Venmo you some money, they really don’t make any money off that transaction. It’s a really good way to monetize. The stablecoin, we can talk all day about my thoughts on cryptocurrencies and stablecoins and things like that. Cross-border transactions are expensive. This is why credit cards with no foreign transaction fees do so well in the marketplace. Anything you could do to eliminate that charge and maybe even increase your own margins by being able to offer that as a back-end on their infrastructure is being able to move money around for free. It’s something that I’m excited to see develop and it sounds like another piece of the efficiency puzzle.

Ricky Mulvey: I think it’s easy to dunk on the stablecoin, but if they can solve a lot of those cross-border transactions, that’s huge. Also, among its competition, I’m more willing to trust that PayPal has $1 to backup every single one of their PY USA’s or at least they can make good on it. I know you want to talk about the active accounts though, because that’s a part of the story that’s not getting covered a ton, but I know stands out to you.

Matt Frankel: The headline number, is that the number of active accounts on PayPal declined by 1% year over year, which is about 4 million people. But that doesn’t really tell the full story. PayPal had four consecutive quarters quarter-over-quarter declines in their user base. This is the first time in the past five quarters where they were reported a sequential growth of about a million use active users quarter-over-quarter. That’s especially big in the first quarter because it’s bad seasonality trends. A lot of people are active in the fourth-quarter for holiday purposes, in simple terms, and drop-off the platform in the first quarter. Even including that, they net added active users this quarter, which is a nice reversal.

Ricky Mulvey: I’m a PayPal shareholder, so I’m bringing in some bias to this next question about to ask you. PayPal, they raised revenue guidance which they got hit for in the past for, for essentially lowering it, they expanded the operating margin, they’re adding users. What’s going on with the market? It’s just a completely lukewarm reaction to these results.

Matt Frankel: The biggest raise they made was actually earnings guidance because they had in their fourth-quarter report expected earnings to be roughly flat this year. Now they’re saying a mid to high single-digit percentage growth. That’s a pretty big adjustment. But the question is, is this just one time efficiency adjustments that the new CEO is making? Obviously, more earnings is better than less earnings. Now, if their full-year guidance comes true, PayPal trades for something like 11 times times earnings right now, it’s a really cheap stock. You would expect a bigger reaction, especially when you’re considering not only the earnings growth, but the top and bottom-line beats this quarter. You have the accounting change, which I love the accounting change, we got to hit that in a minute. The return to growth in the active user base, you would expect a better reaction. I’m a PayPal shareholder too, and I expect a better reaction.

Ricky Mulvey: Let’s hit the accounting change because I can’t title the episode: PayPal Makes an Accounting Change, but why is this something that the investors should care about?

Matt Frankel: Well, they changed the way that they report adjusted earnings. A lot of commentators, including Warren Buffett and Charlie Munger, have always looked down on adjusted metrics because they don’t really take everything into account that actually is a cost. PayPal specifically, and this is the only time I’ve heard of it, maybe you’ve heard of other companies doing this, they’re now reporting stock-based compensation as part of their adjusted earnings. Normally, that’s the adjustment that you see these tech companies make the lake their earnings look better than they are. But now PayPal they’re owning it. They’re saying here’s what we’re paying our people. It’s not just that they made the accounting change, they’re actually adjusting their incentive plan to better align with shareholder interest. Not just, here’s your paying in stock, we’re going to give you more stock if you deliver returns for shareholders. I love these changes. I hope other companies follow this lead because we’re not the only ones who think it should be included in earnings. It is an expense, so I’m happy to see it.

Ricky Mulvey: It’s something that might hurt the models, but Chriss was talking about on the earnings call, they’re saying, we’re not going to hide this. We’re a pay for performance culture and so we’re going to highlight it. I want to move to Kinsale because this is another, what I would describe as a befuddling market reaction. I know Kinsale is familiar to us, but for those listening who haven’t heard of it, this is a company that focuses on excess and surplus insurance for your hard-to-reach places. If you’re a business or an event and you have a tough time finding insurance, Kinsale will help you. Think about if you want to host an equestrian event inside of a weed dispensary, Kinsale will help you with the insurance for that. Why should you care from what we’re about to talk about? Well, Matt on Twitter was saying, this is a massive buying opportunity, so we’re going to find out why. But let’s focus on the business first. The company is getting beaten up essentially because of the slowdown in growth of its premiums. But it’s also getting a lot more in terms of investment income. That’s the table. What’s going on with this business right now, Matt?

Matt Frankel: The investment income, that’s not really their doing. You really can’t give the company credit for that. That’s like saying, my savings account is making five times what it was two years ago. I didn’t do anything smart, the interest rates went up. Kinsale, like you mentioned, they’re in specialty insurance. The key thing to know about that business, one, it’s really hard to do, which is why they have companies like Kinsale, and you can’t just go to Progressive if you have a demolition business or something else, that’s really hard to insure. These companies exist because they’re good at what they do and if you’re good at it, it’s very profitable. Most insurers are happy with an underwriting margin of 3-5%, and then they make the rest of their money on investments. Kinsale’s underwriting margin averages more than 20%. I think it’s something like seven times the industry average, it’s just their underwriting margin before we even get into investments. It was a slowdown in growth, if you want to call it that, but it was. Gross written premium growth was 26% versus 34% year over year in the previous quarter, net investment income you mentioned it was up 59% year-over-year. It was up 71% in the previous quarter. In my opinion, this is the big reason we saw the reaction that we did. The combined ratio, which is an indicator of underwriting profit, went from 72.1%, subtract that from 100, you get your underwriting profit so lower is better to 79.5%. About 7.4% jump in the wrong direction in the combined ratio, and that’s why I think the market reacted the way it did.

Ricky Mulvey: Quickly, underwriting profit, essentially. What’s that mean?

Matt Frankel: If I’m an insurance company, I collect a $1,000 in premium, some of that’s going to get paid out as claims. That’s what you call your loss ratio and some of it’s going to be used to just run the business, after paying my office rent things like that. Add the two of those together, you get your combined ratio. Whatever is left after your combined ratio is your underwriting profit, so 100% of your money, if your combined ratio is 90% the other 10% will be your underwriting profit. Kinsale’s underwriting profit, put in more simple terms, went from about 28% to about 20%.

Ricky Mulvey: The other trend that’s going on here, and I haven’t seen a lot of discussion about this, is the rise of seeded written premiums, which essentially means that Kinsale is transferring their policies to a reinsurer to someone else. What’s going on with this? Why are they spending so much more money on reinsurance right now?

Matt Frankel: That’s not necessarily a terrible thing. It’s like a sportsbook, laying off some of the action it receives. Insurances is an inherently risky business, specialty insurance is riskier than most and reinsurance policies are used to cap an insurer’s losses. A lot of it could be because we’re entering peak hurricane season. A lot of insurers get scared when you get through the second and third quarter because that’s when all the natural disasters tend to happen. I don’t know if that’s what the management is thinking there, but they’re definitely shifting some money into reinsurance, and it’s a common part of the insurance business. You don’t want a natural disaster to wipe out your business. You want to make your losses manageable and if that means spending a little more on reinsurance, then so be it. By the way, that combined ratio under 80% is still pretty great, just so investors know.

Ricky Mulvey: Then finally, you went out on the X platform, the platform formerly known as Twitter. Calling this dip on these results, a massive buying opportunity, lay out the thesis. Why is this a massive buying opportunity for Kinsale Capital?

Matt Frankel: Well, even if it slows down 26% growth, it’s still growth. Even if your underwriting margin dropped to 20%, that’s still seven times what the average insurers making. Now, the biggest reason for this reaction is because Kinsale is generally priced for perfection. They’ve a great history of under-promising and over-delivering. Just for example, Kinsale trades for about 25 times forward earnings and about seven times sales. I own another insurer called MetLife. I’m sure you’ve heard of them. They trade for less than one-time sales and have an eight times forward earnings multiple. There are very expensive insurer relative to their peers, priced for a lot of growth and I think that slowdown in growth is scaring people, but it shouldn’t. There’s a lot of investment income that’s embedded in the portfolio that we haven’t seen yet. These are mostly fixed-income security, so as they roll over to today’s interest rates, you’re going to see that investment income climb even further. I think there’s a lot of unlocked potential on that side of the business. I like what they’re doing in their investment portfolio. They are putting more money in investments like common stocks, like a Berkshire Hathaway would. Not a giant portion of their portfolio, but a lot and I love the management team, they’re the only pure-play in specialty insurance in the space, and they have about a 1.1% share of the market right now. If you think that they can’t keep up that 26% growth rate, they can.

Ricky Mulvey: It’s a good place to end it. Matt Frankel, appreciate your time and your insight on this one.

Matt Frankel: Always glad to be here.

Ricky Mulvey: How do you find a financial advisor, and what should you ask them? Alison Southwick and Robert Brokamp offer up some questions to ask in that very first meeting.

Alison Southwick: There comes a time and everyone’s life when they need a little help and your finances are no different. Maybe you’ve heard bro over the years say stuff like, I’m Robert Brokamp, if you’ve had a major life event, it might make sense for you to talk to a professional fee-only advisor.

Robert Brokamp: Is that what I sound like?

Alison Southwick: No, but that is what strong dads sounds like. Anyway, this sounds easy enough. But we’ve heard from plenty of people over the years who struggled to find a good financial advisor they could trust. Today we’re going to tackle this topic. Bro, when should you enlist the help of a financial advisor?

Robert Brokamp: I would put it in two broad categories. One is you’re mostly a do-it-yourself, but you just want a second opinion, or you’re about to experience a big life event. Maybe every 5-10 years you want just to make sure that your retirement plan is on track, or you’re getting close to retirement, and you want to make sure you have all your bases covered, or you may have just one big question you’d like help to answer. One of my favorite personal finance columnist is Christine Benz at Morningstar. She knows about as much as anyone about financial planning. But when she and her husband were trying to determine whether they should get long-term care insurance, how to take care of long-term care. They hired a fee-only financial planner to help with that decision. Basically, you just want occasional help, but the other situation is you don’t want to be mostly a do-it-yourself, you want an expert to be helping you along the way every day, though maybe not your entire portfolio. It couldn’t be because you’re just very busy with your career, and your family, and you don’t have the time to become a financial planning and investing expert in your spare time. Or it might be because you’re getting up there in years, and you want to begin a relationship with a financial advisor now in case something happens to you, especially if you’re the person who primarily handles the finances for the family.

Alison Southwick: Not all financial professionals are alike in their credentials, qualifications or expertise. How about you break it down for us? What are our options here?

Robert Brokamp: It’s very confusing because you’ll hear a lot of terms, and they’re almost meaningless. Financial advisor, financial planner, financial consultant, wealth advisor, wealth coach. Because there aren’t many regulations, just about anyone can call themselves a financial advisor. The main differentiation I think to look for is whether someone is a broker, which means they sell products, or a registered investment advisor who is required to act as a fiduciary. We’ll talk about this a little bit more later on. But a fiduciary is someone who is legally obligated to put your interests first. You would think that all financial professionals should be held to that standard, but that’s not the case. The other thing to look for is designations, and there are a bunch, so I’m just going to highlight the biggest. For financial planning the granddaddy of them all is certified financial planner designation requires you to take six classes, pass a pretty hard exam and have three years of experience. One that is gaining more popularity is the Chartered Financial Consultant. You’ll see it as CHFC behind someone’s name. Also, you have to take classes, one more class than the CFP designation have to have experience, you don’t have to pass an exam. If you’re looking for someone who’s a real investment expert, the thing to look for there is the chartered financial analyst or CFA. My opinion, that is by far the hardest one to get. You have to pass three very difficult exams. I know many very smart people who failed one or more of those exams until they eventually passed it and got it. Taxes, of course, you’re looking for a certified public accountant CPA but some of them also have another designation called the personal financial specialists or PFS, which basically means there are tax expert, but they also know financial planning. They are very knowledgeable about many aspects of your finances. If you’re looking for someone to help you with insurance decisions, you are looking for the chartered life underwriter or CLU, which is a designation that shows you know something about life insurance, estate planning, maybe business planning, so those are the biggest. You’ll find plenty of other ones. Some are meaningful, some are not. The key is to look at the requirements in terms of classes, in terms of experience and whether they had to pass any exams.

Alison Southwick: Where do you find them?

Robert Brokamp: Well, I’ll start with the one everyone starts with, and that is referrals. You talk to people you know, you talk to professionals, you work with your attorney or accountant, see who they recommend. The only thing I would say about referrals, though, is that in my experience a lot of people are very happy with their financial advisor. But then when I asked them questions about what the financial advisor does, the financial advisor, actually, is very good. They just like the person, and they’re not knowledgeable enough to know that they’re not getting good service. But still, referrals are a good place to start. But really since the early days of the Motley Fool, we have recommended that you look for a fee-only financial planner. Most of these fee-only financial planners, first of all, they are paid for their service. They don’t sell your products, and they are fiduciaries. There are a few places to find these people. The first I’m going to mention is the one I know the best, Garrett Planning Network started by Sheryl Garrett. I’ve known Sheryl for many years, she was very kind enough to let me attend her conferences here in there, so I’ve gotten to know a lot of their members. In fact, I spoke with their current Managing Director, Eileen Freiberger, got some input from other financial planners, Christopher Lazaro, just to get the insider view with input on this episode. That’s a place to start. There’s also the National Association of Personal Financial Advisors or NAPFA, and the XY Planning Network. You’ll find that there are planners who belong to two or all of these networks because they’re all fee-only financial planners. Most of them will manage money for you, but many of them will also just do projects and charge by the hour or the project. Then finally, I’ll just add, if you work with a financial services firm that you’re happy with, like Vanguard, Fidelity, Schwab, T. Rowe Price, all of them provide wealth management and financial planning services, so you could look to them, but just expect that many of their solutions will be their own products. If you’re going to have your money managed by Vanguard, chances are they’re going to put all your money in Vanguard funds, so there is a little bit of a conflict of interests there.

Alison Southwick: Not only do financial professionals have different scopes of work, some might be absolute crux, sorry to say it. Some might be incentivized to align their own pockets, some might be in competent, some might be right for someone else, but not so right for you. How do you evaluate these people?

Robert Brokamp: Well, first of all, you want to make sure they’re not crux, and there are a couple of ways to do that. You could check what is called broker check offered by FINRA. It’s brokercheck.finra.org. FINRA is the self-regulatory organization for brokers. Then there’s the investment advisor public disclosure website offered by the SEC, that is advisorinfo.sec.gov. You check them. You first of all, we’ll find out whether that person is registered, in what states they are registered, and if there have been any complaints. If someone has been in the business long enough, they might have one or two complaints, but you just want to see what those complaints are and make sure that they were resolved. If someone says that they have a certain designation, go to the website of the governing board of that designation to make sure they actually have it. If they don’t have a designation, you might still go to that website because in some situations someone had the designation, but they lost it due to some ethics violation and you’ll find that on the website, so go to the website of the board or the certified financial planners and CFAs. If you’re going to work with attorney, go to the website of the state Bar Association to make sure that everything is fine there, do those checks. But then once you have gone through these various processes, you should identify and interview multiple planners, and they will likely allow you to do what’s something called a get-acquainted meeting where you talk for maybe a half-hour or so and just to make sure that they can provide what you’re looking for and that you’re comfortable with working with them.

Alison Southwick: Let’s go through some questions you’ll want to ask in this meeting, as well as the answers that you’re going to want to hear. The first question to ask is, what are your qualifications/credentials? Maybe don’t say this lash.

Robert Brokamp: (laughs) Obviously they’ll probably highlight some of the designations they have. They’ll highlight their experience, maybe talk about how they became a financial professional. That’s always an interesting question to what brought you to becoming a financial professional. There are some things that they may have that are not listed on their website. For example, for me personally, I got my masters in personal financial planning. That would be something you would look for and what was their education. But really what you’re looking for the comfortability that you find with them talking about their qualifications. Do you feel comfortable that they know enough to provide what you’re looking for?

Alison Southwick: Next question. Are you a fiduciary?

Robert Brokamp: We touched on this a little bit. The tricky part about fiduciary is you can be a fiduciary in many ways. You might be a fiduciary because you work for a firm that is a fiduciary like a registered investment advisory firm. You could be a fiduciary because of the designation you have. Your firm may not be required you to be a fiduciary, but for example, if you have these certified financial planner designation, you are expected to act as a fiduciary. Then there are circumstances in which you have to act as a fiduciary. The Department of Labor just passed a rule that said, if you are advising someone on their rollover from a 401K to an IRA, starting this September, you have to act as a fiduciary. Part of it is going to happen this September, another part next September. Expect that the industry is going to protest this, especially the insurance industry, so we’ll see if it happens. But what you’re looking for is for them to explain whether they are fiduciary, whether they understand what a fiduciary is. There are circumstances in which you might find a very good financial advisor who’s not technically a fiduciary. What you’re looking for there is that she or he is explaining to you in such that they are looking out for your best interests.

Alison Southwick: Next question is to ask, how are you compensated and what are the all-in costs I’ll be paying?

Robert Brokamp: This is where the difference between like a fee-only planner and broker really comes in. Sometimes the solutions someone provides will generate a commission for them. You just want to be very clear that the advice you’re getting is the best thing for you and not the thing that is going to generate the biggest commission. You want to understand how they are getting paid, so you can understand any potential conflicts of interest. These days more people are charging an assets under management fee. The average is about 1%. It’s usually a little bit higher if you have a smaller account, smaller being 250,000, and it’s usually lower if you have over a $1 million. But even in that situation, you want to find out is that the only fee? Because if you are paying the advisor 1% a year to manage the money, but then they put you in mutual funds or separately managed accounts that charge another 1%, in that case, the all-in cost is 2%, so you want to be very clear about that. Now, if you are looking for just a onetime analysis or a onetime financial plan, you’re going to have to pay by the hour or by the project. The fees on that are going to vary based on the experience of the planner as well as the city they live in, but expect to pay anywhere $100-$500 an hour or on a project basis, a $1,000 to $10,000, again, based on the person’s experience, but also the complexity of your plan.

Alison Southwick: Next question to ask is, what’s your investment philosophy?

Robert Brokamp: If you’re going to have someone to manage your money, you want to make sure that you are at least mostly on the same page. You’ll find that many fee-only financial planners are pretty committed indexers, is not exclusively, but a lot of them are. If you are an active stock picker, you don’t want to choose a financial advisor who’s just going to put you in index funds unless you are looking for something besides wealth management. I’ll just point out when I was talking to Eileen Freiberger about trying to find a financial advisor, she said that often many people from many readers are members of The Motley Fool reach out to them and they’re looking for advice about stocks, their portfolio and stuff like that. Many of the folks at the Garrett Network don’t look at individual stocks so much. It’s just important that you are finding someone who could provide what you’re looking for.

Alison Southwick: These are all great questions. I know one red flag that I saw when we were researching this is that your advisors should actually do more listening than talking. I know we just did a bunch of questions to ask them, which would require them to do a lot of talking. But one of the good pieces of advice I saw was that your advisors should be very very interested in you, your interests, what you want, your goals, and you should be doing more talking than they should.

Ricky Mulvey: 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 yourself stocks based solely on what you hear. I’m Ricky Mulvey. Thanks for listening. We’ll be back tomorrow.