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The company recently raised its guidance, signaling strong pricing power. Yet, we think the market is underappreciating the magnitude and duration of this “supercycle”. This is a business with a strengthening technological moat and offers a way to invest in the AI boom at a valuation that doesn’t fully reflect its future earnings power.

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The market has recently punished the stock following a profit warning, creating what we see as a compelling entry point. This is a business with strong fundamentals, a robust growth strategy, and a debt-free balance sheet, now available at a price that fails to reflect its long-term potential.

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Case in point: this one boasts a 22.5% free cash flow margin for FY24 and a trailing twelve-month free cash flow yield of 12%.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers, premium members can benefit from a 3-month free trial)

Over the past decade, this company has delivered remarkable shareholder returns of +598% (a CAGR of ~21.4%), higher than its revenue growth of 13.1% but lower than its net income CAGR of 54.2%.

So, which company is it?

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It’s been a while since we featured a guest post, but today we have an exciting one for those interested in dividend stocks and international opportunities.

We’re pleased to welcome Max, the founder of MaxDividends.

Max is a private investor with a proven dividend growth strategy and a mission to help others build a reliable, steadily growing stream of passive income, perfect for anyone aiming to retire early and live off dividends. This article will give you a fresh perspective on finding high-quality dividend opportunities beyond US borders.

Max Dividends

High yield & Dividend Growth stocks worth investing in to boost your passive income for living off dividends.

Intro

💡 Invest in companies you believe in - W. Buffett

For investors seeking stable sources of income, companies that consistently increase dividends represent an important segment of the portfolio. In this review, we will focus on international Dividend Aristocrats — companies that reliably pay and raise their dividends.

We will examine leaders such as Coloplast A/S, Nippon Telegraph & Telephone Corp, ASSA ABLOY AB (publ), Roche Holding AG, and Computershare Ltd. Each of these companies has strong financial positions, successful business models, and growth prospects, making them attractive to long-term investors.

1. Coloplast A/S (COLO-B)

Coloplast A/S develops and sells intimate healthcare products, including ostomy care, continence care, wound care, and respiratory care solutions. The company operates in several countries, including Denmark, the US, the UK, and France. It offers catheters, bowel irrigation systems, skin care products, and treatments for urological and gynecological conditions.

History of the Company

Coloplast A/S was founded in 1954, starting with an idea inspired by a personal experience. Elisa Sørensen, a nurse, came up with the world's first adhesive ostomy bag after her sister, Thora, had surgery to create a stoma and struggled with the fear of leakage when going out in public. Elisa, understanding the issue her sister faced, designed a solution. The idea was then developed further by civil engineer Aage Louis-Hansen and his wife, Joanna Louis-Hansen, a trained nurse, who created the first ostomy bag. This simple yet life-changing innovation helped Thora and thousands of others live fuller lives.

Today, Coloplast's product range has expanded to include ostomy care, continence care, skin and wound care, and urological products. The company employs over 10,000 people worldwide and continues to improve the quality of life for people with intimate health needs.

A Proven Dividend Aristocrat 🎩

Coloplast A/S is a proven Dividend Aristocrat, with a solid track record of consistently increasing its dividend payments over time. The company's 5-year dividend growth stands at 29%, and it has maintained dividend payouts for 30 consecutive years. The 5-year average payout ratio is 90%, demonstrating the company's commitment to returning value to its shareholders.

The projected 10-year dividend yield on cost (Max Ratio) is estimated at 4.81%, reflecting a strong potential for long-term dividend returns.

Financial Statement

If you want to stay on top of your portfolio's health, don't forget to check in on the financials of the companies you've invested in. The better shape they’re in, the better your results will be. Keep an eye on their quarterly and annual reports to see how they're performing.

Here is a quick dive into Coloplast A/S over last years

The strongest and most stable companies tend to have a Financial Score of 80+, with the very best ones hitting 90+. If you see that score start to dip below 80, that’s your cue to consider jumping ship before things get worse.

👉 Learn More about Financial Score

Our Paid Members get access to a curated watchlist of 19,000 companies worldwide, all scored by our team on a regular basis. Companies like Coloplast A/S are on that list, too.

Future Growth Prospects for Coloplast A/S.

FY 2024/25 guidance on organic growth of 8-9% and on EBIT margin before special items of around 28% unchanged.

With MaxDividends, it's easier than ever to access top dividend companies, track your results, and explore new dividend ideas.

• Dividend Eagles

The MaxDividends Top Stocks List features ~100 of the most reliable dividend companies in the U.S. market, each with 15+ years of consecutive dividend increases. These stocks are carefully selected based on MaxDividends' strict criteria for consistency and reliability.

• Dividend Kings

Dividend Kings represent the elite tier of dividend growth stocks. With 50+ years of consecutive dividend increases, these companies offer unparalleled income stability, making them a top choice for investors seeking long-term reliability in an unpredictable market.

• Dividend Aristocrats

With 25+ years of consecutive dividend increases, Dividend Aristocrats are among the strongest dividend growth stocks. These companies have a proven track record of not only maintaining but consistently increasing their dividends, often outperforming the broader market over time.

2. Nippon Telegraph & Telephone Corp (9432)

Nippon Telegraph & Telephone Corp (NTT) is a major telecommunications company based in Japan. It operates through four main segments: Integrated ICT Business, Regional Communications Business, Global Solutions Business, and Others. NTT provides mobile services, domestic and international communications, cloud solutions, and IT system development. It also engages in real estate, energy, and other businesses.

History of the Company

Nippon Telegraph and Telephone Corporation (NTT) was founded in 1952 as a state-owned monopoly following the dissolution of Japan's previous government-operated telegraph and telephone services. The company became a key part of Japan's post-war telecommunications modernization. In 1985, the Japanese government initiated the privatization of NTT, leading to the company’s reorganization into several subsidiaries, including NTT East and NTT West. Full privatization was completed in 1999, and NTT was listed on the Tokyo Stock Exchange. NTT continued to expand its technological capabilities and, in 2020, became the first telecom company in the world to offer commercial 5G services. Today, NTT is one of the largest telecommunications companies globally, with revenues exceeding ¥12 trillion (about $112 billion) as of 2023.

A Proven Dividend Aristocrat 🎩

This company is a proven dividend champion with a Max Ratio of 7.39%, indicating an expected dividend yield on cost between 5-9% over the next 10 years. Over the past 5 years, the company has achieved a remarkable 37% dividend growth, with a consistent 21-year track record of paying dividends. Its 5-year average payout ratio is 24%, which suggests a balanced approach to returning profits to shareholders while retaining funds for reinvestment and growth.

Financial Statement

Here is a quick dive into Nippon Telegraph and Telephone Corporation over last years

Future Growth Prospects for Nippon Telegraph and Telephone Corporation.

The company is making significant investments in 5G technology, which is expected to be a major driver of growth, as the global 5G market is projected to grow exponentially. Additionally, NTT is expanding its cloud services, capitalizing on the rising demand for digital transformation across industries. The cloud computing market is anticipated to grow significantly in the coming years, further boosting NTT's revenue potential.

NTT's projected revenue for the fiscal year ending March 2024 is approximately ¥12 trillion ($110 billion), reflecting a 3.5% year-over-year growth, with operating income expected to increase to ¥1.25 trillion ($11.5 billion). The company is also focusing on strategic partnerships, such as its collaboration with Microsoft to enhance cloud solutions, and expanding its presence in emerging markets through local partnerships.

3. ASSA ABLOY AB (publ) (ASSA-B)

ASSA ABLOY AB (publ) is a global leader in security and access solutions, providing a wide range of products and services for institutional, commercial, and residential markets. The company specializes in door opening solutions, including electronic access control systems, mechanical products like locks and handles, and various types of doors. It also offers digital access solutions such as wireless and electronic key solutions, as well as building information modeling software. ASSA ABLOY operates under well-known brands like ASSA ABLOY, Yale, and HID, and serves various industries including aviation, healthcare, education, banking, and retail.

History of the Company

ABLOY was founded in 1907 when a young mechanic from Helsinki, Emil Henriksson, invented a unique locking mechanism based on rotating locking discs, which became the foundation for all ABLOY locks. In 1919, this invention was patented, and the company Ab Låsfabriken (later shortened to Ab Lukko Oy) was established in Helsinki. In 1923, Abloy was acquired by Kone & Siltarakennus, becoming part of the Wärtsilä Group. In 1994, the company merged with its Swedish competitor ASSA, forming ASSA ABLOY, which allowed it to become a global leader in security and access control solutions.

A Proven Dividend Aristocrat 🎩

ASSA ABLOY AB (publ) has shown a strong dividend track record with an estimated 10-year dividend yield on cost (Max Ratio) of 4.07%. The company has demonstrated impressive growth in its dividend payouts, with a 5-year dividend growth rate of 54% and a consistent dividend payout over 14 consecutive years. Its 5-year average payout ratio stands at 40%, indicating a balanced approach between rewarding shareholders and retaining earnings for reinvestment. This solid dividend history positions ASSA ABLOY as a proven dividend champion, making it an attractive option for long-term investors seeking reliable returns.

Financial Statement

Here is a quick dive into ASSA ABLOY AB over last years

Future Growth Prospects for ASSA ABLOY AB.

ASSA ABLOY is forecast to grow earnings and revenue by 9.3% and 6% per annum respectively. EPS is expected to grow by 9.3% per annum. Return on equity is forecast to be 15.5% in 3 years.

4. Roche Holding AG (RO)

Roche Holding AG is a global healthcare company based in Basel, Switzerland, founded in 1896. It operates in the pharmaceuticals and diagnostics sectors, offering solutions in areas such as oncology, ophthalmology, neurology, and respiratory disorders. The company provides in vitro tests for various diseases, including cancer and diabetes, along with digital health solutions. Roche is known for its innovative approach and strong market presence, focusing on both therapeutic products and diagnostic technologies worldwide.

History of the Company

Founded in 1896 in Basel, Switzerland, Roche Holding AG began as a pharmaceutical company focused on producing vitamin products. Over the years, it expanded its portfolio significantly, becoming one of the largest biotech companies in the world. By the end of 2022, Roche reported net sales of approximately 76.8 billion CHF. In the 1920s, Roche introduced its first major product, the sedative “Rocheval,” and by 1931, it established its first overseas subsidiary in Vienna, Austria. The company continued to grow internationally through significant acquisitions, such as the purchase of Genentech in 1990, which strengthened its biotechnology capabilities. Today, Roche maintains a robust pipeline of over 30 molecules in late-stage development, particularly in oncology, immunology, and neuroscience.

A Proven Dividend Aristocrat 🎩

The company has a stable dividend history with 28 consecutive years of payouts. The expected 10-year dividend yield is 3.67%, reflecting a combination of the current dividend yield and an average dividend growth rate of 10% over the past 5 years. The 5-year average payout ratio stands at 59%, indicating that the company consistently distributes around 59% of its profits as dividends. This makes the company an attractive option for long-term investors seeking steady returns.

Financial Statement

Here is a quick dive into Roche Holding AG over last years

Future Growth Prospects for Roche Holding AG.

Innovation is central to Roche's strategy, with the launch of new drugs like Risdiplam for spinal muscular atrophy. This product is expected to generate CHF 2 billion in sales by 2025. Additionally, Roche is expanding into emerging markets, particularly in the Asia-Pacific region, where it saw a 15% increase in revenue in 2023, contributing around CHF 5 billion to total sales.

Acquisitions, such as the purchase of Spark Therapeutics for USD 4.8 billion, are also fueling growth. This acquisition strengthens Roche’s presence in gene therapy and is expected to add CHF 1.5 billion in sales by 2024. With over 40 candidates in its pipeline, Roche is set to drive revenue growth, projected at a 4-5% compound annual growth rate (CAGR) through 2025.

Strategic partnerships, including collaborations with Regeneron for the antibody drug Dupixent, are expected to contribute approximately USD 10 billion in combined revenues by 2025. Roche’s commitment to R&D, with CHF 12.5 billion spent in 2022, positions the company at the forefront of innovation in the biopharmaceutical sector.

5. Computershare Ltd. (CPU)

Computershare Ltd. is a global financial services company that specializes in providing a wide range of services, including issuer services (such as register maintenance and corporate governance), corporate trust, employee share plans, mortgage and property rental services, communication services, and technology solutions. The company operates across various international markets, including Australia, Hong Kong, the UK, and Canada. Established in 1978, Computershare is known for its expertise in capital markets and is recognized for its strong financial performance and commitment to sustainability.

History of the Company

Computershare Ltd. was founded in 1978 in Melbourne, Australia, as one of the city's first start-up technology companies. Initially, the company focused on providing computer services to businesses that needed to automate processes. Over time, it transitioned to offering specialized computer bureau services to Australian share registrars, where it quickly excelled. By 1994, the company went public on the Australian Securities Exchange (ASX), with a market capitalization of AUD 36 million. From there, Computershare expanded globally, acquiring successful companies and growing organically. Today, it operates in multiple countries, managing over 75 million customer records and employing more than 12,000 people worldwide. Through its strategic growth in areas such as employee equity plans, corporate governance, and mortgage services, Computershare has become a leading player in the financial services industry.

A Proven Dividend Aristocrat 🎩

Computershare Ltd. is a proven dividend champion, demonstrating a strong commitment to returning value to its shareholders. The company's Max Ratio indicates an expected 5-9% dividend yield on cost over the next 10 years, reflecting its solid financial standing. With a remarkable 88% growth in the last 5 years, it has maintained a consistent dividend track record for 11 consecutive years. The 5-year average payout ratio stands at 106%, showcasing the company's dedication to rewarding its investors despite its growing business.

Financial Statement

Here is a quick dive into Computershare Ltd. over last years

Future Growth Prospects for Computershare Ltd.

Computershare is forecast to grow earnings and revenue by 7.2% and 1.5% per annum respectively. EPS is expected to grow by 7.6% per annum. Return on equity is forecast to be 40.5% in 3 years.

Final Thoughts

International dividend aristocrats, like Coloplast, NTT, ASSA ABLOY, Roche, and Computershare, are companies with a history of stable and growing dividends. They have strong businesses, sound finances, and growth prospects. Investors looking for reliable income and long-term capital growth should pay attention to them. These are just a few examples, but they demonstrate that international dividend companies are an attractive option for an investment portfolio.

To your wealth, MaxDividends Team

Max Dividends

High yield & Dividend Growth stocks worth investing in to boost your passive income for living off dividends.

Thank you for reading Max’s work today. We hope it offered valuable insights and helped expand your investment horizon.

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Disclaimer: The team does not guarantee the accuracy or completeness of the information provided in the newsletter. All statements express personal opinions based on own financial and business analysis. Any estimates or forward looking statements made are inherently unreliable. No statement of opinion is an offer or solicitation to buy or sell the financial instruments mentioned.

The content of our newsletter is not a trading or investment advice and we do not provide any personal investment advice tailored to the needs of any recipient. The information provided should not be considered as a specific advice on the merits of any investment decision. Securities trading involve risk and you might lose your capital and/or incur other damages. Investors should make their own research and consult their registered investment advisor or financial advisor before taking any investment decision.

Neither the team nor any of its affiliates accept any liability whatsoever for any direct or indirect loss however arising, from any use of the information contained herein. Any unauthorized copy of this newsletter or its contents is illegal.

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This month, we’re featuring a niche market leader in the semiconductor supply chain, currently trading 57% below its 52-week high. The drop stems from softer 2025 guidance, impacted by tariff-related uncertainty that has affected nearly every company in the sector.

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Despite near-term headwinds, the company’s fundamentals remain strong:

• EBIT margins have averaged 23% over the past decade (currently lower)

• Return on invested capital (ROIC) has averaged 22%, now closer to 18%

• Revenue CAGR: 6.2%

• Operating income CAGR: 9.1%

• Net income CAGR: 11.3%

• EPS CAGR: 14.9%

• Total shareholder return over the past decade: +302.7% (~15% CAGR)

This performance shows that price has closely followed earnings per share growth.

However, since the company’s Q4 results announcement and the revised 2025 outlook, valuation multiples have compressed significantly, by roughly 35–40%. It now trades at:

• EV/EBITDA (NTM): 14.5x

• P/E (NTM): 21.6x

These multiples might not scream "deep value," but in a duopoly, a premium valuation is both expected and deserved.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers, premium members can benefit from a 3-month free trial)

Contents:

1. The business

2. Valuation

3. Catalysts

4. Risks

Read more

For the charts, we're using Koyfin, which you can access at a 20% discount via our affiliate link. Additionally, StockOpine annual paid subscribers are eligible for a 3-month free trial, just shoot us an email.

In this version, we will explore the Supply Chain Management (SCM) and Logistics Software industry. The role of SCM/logistics software in modern business is mission-critical as it provides real-time visibility into complex global supply networks and helps companies optimize operations for efficiency and cost savings.

As supply chains become more global and interconnected, robust software solutions are essential for maintaining agility and resilience. In recent years, high-profile disruptions (from pandemic-related shutdowns to geopolitical events) have thrust supply chain operations into the spotlight, prompting companies to accelerate digital transformation and invest in advanced SCM platforms to keep their businesses running smoothly.

According to Gartner, the SCM market is broken down into Supply Chain Planning (processes related to demand forecasting, supplier relationships, manufacturing planning), Sourcing and Procurement (processes related to purchasing: i.e. managing vendor terms for trade & payments), Supply Chain Execution (processes related to delivery and distribution: i.e. purchase orders, inventory management, delivering goods to customers).

Source: Gartner

The industry includes a broad range of players, ranging from large-scale suite providers to niche providers specializing in specific verticals. Therefore, the below peers do not necessarily compete head-to-head. In our analysis, we will cover public companies in the industry but we will exclude the largest players like SAP, Oracle, Blue Yonder (under Panasonic) which offer SCM solutions as part of their broad suite of services.

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1. Key Players

• WiseTech Global (Ticker - WTC): An Australian software provider specializing in logistics solutions. Its flagship platform, CargoWise, is widely used by freight forwarders, 3PLs, and logistics providers to manage freight operations, customs compliance, warehousing, transport, and port logistics. WiseTech’s customers range from small and mid-sized domestic and regional logistics providers to large multi national and global logistics providers, including all of the Top 25 Global Freight Forwarders and 46 of the Top 50 Global 3PLs.

• Manhattan Associates (Ticker – MANH): Leading Supply Chain Commerce company offering software solutions that helps retailers, wholesalers, manufacturers, and logistics providers to manage their supply chain, inventory and omnichannel operations. Manhattan’s flagship platform, Manhattan Active, offers warehouse management, transportation management, and order management solutions. The company excels in Supply Chain Execution and is recognised as a Leader in Gartner’s Magic Quadrant for Warehouse Management Systems.

• The Descartes Systems Group Inc. (Ticker - DSG): A global provider of logistics technology solutions serving transportation providers (air, ocean, and trucking), third-party logistics firms, freight forwarders, customs brokers, and distribution-focused businesses. Descartes offers a comprehensive suite of software for routing, transportation management, e-commerce fulfillment, customs compliance, global trade intelligence, and B2B connectivity. Its platform enables real-time shipment tracking, delivery scheduling, cost optimization, and regulatory compliance management.

• SPS Commerce, Inc. (Ticker - SPSC): A leading provider of cloud-based retail supply chain management solutions, enabling seamless collaboration among retailers, suppliers, manufacturers, distributors, and logistics firms. Its SPS Commerce platform supports omni-channel operations, order fulfillment, and supply chain automation. Key offerings include Fulfillment, which streamlines order processing and invoicing, and Analytics, which optimizes sell-through data management for business partners.

• Kinaxis Inc. (Ticker - KXS): A Canadian provider of cloud-based subscription software for supply chain operations in the United States, Europe, Asia, and Canada. The company is best known for it flagship product RapidResponse, recognized as a Leader in Gartner’s Magic Quadrant for Supply Chain Planning Solutions. The company serves midsize to large enterprises in aerospace and defense, automotive, consumer products, electronics, industrial, life sciences, logistics, and retail industries.

Note (12 Mar 2025): AU$ 1= $0.628, C$1=$0.693

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2. Industry dynamics

Market size

Gartner valued the industry at $20.2 billion in 2022, with an expected CAGR of 15.2%, reaching $35.7 billion by 2026. Grand View Research valued the industry at $23.2 billion in 2023, projecting CAGR of 11.2% from 2024 to 2030.

Key Market Drivers

The SCM software market has consistently expanded at double-digit growth rates, driven by several key factors:

• E-commerce and omnichannel retail: Increase in e-commerce and omnichannel retail is driving the need for SCM software to handle various sales channel integrations, fulfilments, fast-deliveries, inventory management and increased sale volumes.

• Digital Transformation: Companies have digitizing their supply chains, replacing manual processes with SCM solutions to enable real-time visibility and improve operational efficiencies accross their global supply networks.

• Globalization of Supply Chains: As organizations manage more complex supply chains, they are turning to SCM solutions to coordinate suppliers, manufacturers, 3PLs, and retailers in real time​.

• Cloud computing: The shift to cloud-based SCM solutions is accelerating adoption due to their scalability, cost-effectiveness, and faster updates compared to traditional on-premise solutions.

• Emerging Technologies (AI & IoT): The integration of emerging technologies such as Artifitial Intelligence and IoT is accelerating industry growth by enabling predictive analytics, demand forecasting, real-time tracking of goods and automation. For example, AI-powered analytics help companies anticipate demand spikes or disruptions and optimize routes and inventory accordingly. Early adopters of AI-driven supply chain management have seen significant improvements (such as double-digit percentage reductions in logistics costs and inventory levels) by leveraging these tools. In fact, according to Gartner, over 75% of supply chain software providers will integrate AI and advanced data analytics in their applications by 2026.

Challenges

The industry is competitive and is generally fragmented with niche players, while large software enterprises like SAP and Oracle are controlling substantial share of the market, offering SCM as part of their larger suite of solutions. Their extensive customer bases and all-in-one platforms make it difficult for standalone SCM software providers to compete. Many companies prefer integrated solutions from vendors they already work with, making it harder for independent SCM software firms to win contracts. With a highly competitive landscape, SCM software firms must continually differentiate their offerings through innovation and specialized functionalities. Additionally, cloud-computing lowered the barriers of entry in the industry, enabling new AI-driven SCM startups to emerge and challenge incumbents.

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3. Key Metrics

Revenue Growth

All five companies achieved solid revenue growth over the last 5 years. WiseTech global has experienced the highest revenue growth, achievieving a 5-year CAGR of 23.2%, followed by Kinaxis at 20.3%, SPS at 17.8%, Descartes at 14.9% and Manhattan at 11%. However, this comparison is not entirely apples-to-apples, as WiseTech, SPS, and Descartes have been more active in M&A than Manhattan and Kinaxis. Among the group, Manhattan was the only company to report a revenue decline in 2020, as its business was affected by pandemic-related disruptions in key customer markets, as well as the short-term effects of its transition to a cloud-based subscription model.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Profitability

On profitability, WiseTech stands out with an impressive EBIT margin of 39%, demonstrating its dominant position in logistics software, its strong pricing power, and the stickiness of its platform among global freight forwarders. Descartes follows with a 29% EBIT margin, reinforcing the trend that logistics software companies tend to have higher margins than SCM software providers.

At the lower end of the spectrum, Kinaxis operates with a significantly lower EBIT margin compared to peers. This is largely due to higher mix of professional services (implementation and support) which is nearly 30% of revenue and inherently carries lower margins than software subscriptions. Additionally, it possibly reflects higher competion and ultimately lower pricing power in the Supply Chain Planning market that Kinaxis mainly operates.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Asset Turnover

From an efficiency standpoint, Manhattan holds the highest asset turnover ratio, reflecting its strong revenue generation relative to its asset base. SPS Commerce and Kinaxis follow closely behind, while Descartes and WiseTech rank lower due to their higher levels of M&A activity. This is also evident in their balance sheets, where goodwill accounts for 56% of Descartes’ total assets and 55% of WiseTech’s, compared to just 8% for Manhattan and 10% for Kinaxis.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Returns on Capital

On Return on Capital (ROC), Manhattan is the clear leader, delivering an impressive 51% ROC, significantly outpacing its peers. This superior ROC is driven by organic growth and aggressive share repurchases, with Manhattan reducing its share count by approximately 16% over the last decade. In contrast, WiseTech ranks second with an 11% ROC, benefiting from strong margins, but at the same time, its heavy M&A activity drags down its capital efficiency. Kinaxis has the lowest ROC at 2%, reflecting its lower profitability.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Debt to Equity

When assessing financial leverage, all five companies maintain relatively low debt-to-equity ratios, presenting minimal financial risk. Descartes has the lowest leverage at just 0.6%, whereas Manhattan has the highest at 17.2%, though still at comfortable levels.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

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Valuation

Turning to valuation, the industry’s EV/EBITDA multiples have contracted in recent months, trading below their five-year average levels. High industry valuations have historically been supported by strong revenue growth, stable profitability, and long-term secular tailwinds.

As this analysis looks at the ratio in isolation, since factors like moat, financial health, and earnings quality are assessed in the metrics we looked earlier, we rank them based on deviation from their 5-year average. Kinaxis ranks first with a 31.7x (53.9x-22.2x) deviation, followed by Manhattan at 18.2x (45.9x – 27.7x), SPS at 13.5x (33.3x – 19.8x), and WiseTech at 10.5x (48.8x – 38.3x).

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Estimated EPS growth

Looking ahead, analyst estimates for EPS growth over the next three years favor WiseTech, with a projected CAGR of 33.2%, followed by Kinaxis at 27.2%, Descartes at 22.6%, SPS Commerce at 16.4%, and Manhattan at 7.4%.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers), StockOpine Analysis

4. Total score & Conclusion

Note: In each category, we assign 3 points to the top-ranked company, 2 points to the second, 1 point to the third, and 0.5 points to the fourth. Equal weighting is applied across all categories to mitigate personal biases, except for Returns on Capital, which we consider one of the most critical ratios in assessing a company. Therefore, we've doubled the score for this metric.

Using our weighted scoring system, WiseTech Global ranks as the clear winner, followed by Manhattan Associates. If we had to highlight one stock for further analysis, it would be WiseTech Global, given its high profit margins, strong growth profile, and dominant market position.

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Disclaimer: The team does not guarantee the accuracy or completeness of the information provided in the newsletter. All statements express personal opinions based on own financial and business analysis. Any estimates or forward looking statements made are inherently unreliable. No statement of opinion is an offer or solicitation to buy or sell the financial instruments mentioned.

The content of our newsletter is not a trading or investment advice and we do not provide any personal investment advice tailored to the needs of any recipient. The information provided should not be considered as a specific advice on the merits of any investment decision. Securities trading involve risk and you might lose your capital and/or incur other damages. Investors should make their own research and consult their registered investment advisor or financial advisor before taking any investment decision.

Neither the team nor any of its affiliates accept any liability whatsoever for any direct or indirect loss however arising, from any use of the information contained herein. Any unauthorized copy of this newsletter or its contents is illegal.

Our posts may contain affiliate links, which means that we might get a commission if you decide to sign-up using any of these links. No extra cost is charged to you.

By subscribing / reading our newsletter or any affiliated social media accounts, you indicate your unconditional acceptance to the above and your unconditional acceptance to our terms and conditions.

This month’s edition features a market leader with exceptional margins and industry-leading returns on capital within a controversial industry. Over the past decade, this company has delivered remarkable shareholder returns of +5,015% (a CAGR of ~48%), closely aligned with its revenue CAGR of 46.5% and operating income CAGR of 58.9%. Today, its valuation multiples have been cut in half, trading at EV/EBITDA (NTM) 9.3x and P/E (NTM) 12.6x, presenting a compelling opportunity for long-term investors.

Contents:

1. The business

2. Valuation

3. Catalysts

4. Risks

Read more

For the charts, we're using Koyfin, which you can access at a 20% discount via our affiliate link. Additionally, StockOpine annual paid subscribers are eligible for a 3-month free trial, just shoot us an email.

1. Key Competitors

• Diageo (Ticker – DGE): A British multinational alcoholic and non-alcoholic beverage company with a portfolio of over 200 brands. Well-known brands include Guinness (beer), Smirnoff (vodka), Johnnie Walker (Scotch whiskey), and many more.

• Pernod Ricard (Ticker – RI): A french producer of iconic alcoholic beverages, including Malibu (rum), Chivas Regal (whiskey), Jameson (whiskey), and Absolut (vodka).

• Brown-Forman Corporation (Ticker – BFB): A US-based company that owns some of the world’s largest brands, including Jack Daniel’s (whiskey), Diplomatico (rum), and El Jimador (tequila).

• Anheuser-Busch InBev (Ticker – ABI): The world’s largest brewer, headquartered in Belgium, specializing in alcoholic beverages such as beers and soft drinks. Notable beer brands include Budweiser, Corona (outside the U.S.), Natural Light, and Stella Artois.

• Constellation Brands (Ticker – STZ): The largest beer importer in the U.S., specializing in beer, wine, and spirits. Constellation owns among others the U.S. and Mexico rights to the Corona brand, as well as Modelo Especial and Pacifico.

• Carlsberg (Ticker – CARLB): A Danish multinational brewer with over 670 labels and about 140 brands. Its well-known beer portfolio includes Tuborg, Kronenbourg 1664, Somersby, and more.

• Heineken (Ticker – HEIA): A Dutch brewer with over 170 beer brands. Famous brands include Heineken, Sol, Amstel, Birra Moretti, Desperados, and many more.

Note (10 Feb 2025): 1Dkr = $0.14, €1=$1.03, £1=$1.24

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2. Market size and forecasts

Statista (published in Feb 2024) valued the global alcoholic drinks market at $1.6 trillion in 2023, projecting a Compound Annual Growth Rate (CAGR) of 5.5% from 2024 to 2028, reaching approximately $2.1 trillion. Meanwhile, ISWR (June 2024) forecasted the global Total Beverage Alcohol (TBA) market to grow at a modest +1% CAGR in both volume and value over 2023-2028.

a. Key Market Drivers & Risks

• Premiumization trends remain intact, though slowing, particularly in the premium tier ($22.5 - $30.5 per 75cl bottle). The super-premium segment (+$30.5 per 75cl bottle) continues to grow, driven by millennial and female cohorts.

• Non-alcoholic beverages are on the rise. Diageo saw ~56% growth in its non-alcoholic portfolio for 1H FY25, while the global non-alcoholic market increased by 29% in 1H 2024. Projections for the US non-alcoholic market estimate it will reach $5 billion by 2028, with a volume CAGR of 18%.

• Headwinds include GLP-1 drugs, changing consumer habits, and tariffs, making the industry's growth outlook uncertain.

With Diageo recently withdrawing its mid-term organic sales growth guidance of 5%-7% and Pernod Ricard revising its growth outlook to 3%-6% for FY27-FY29 (down from 4%-7%), the industry's future is uncertain.

At best, the industry may see flat to marginally positive growth, with non-alcoholic trends and premiumization serving as a defensive buffers rather than strong growth accelerators.

b. Brand Value

Kantar released its 2024 ranking of the top 20 most valuable beverage brands, with China’s Kweichow Moutai leading the pack at a staggering $85.6 billion, far surpassing the rest. Following Moutai, four beer brands made the list, with Corona securing the second spot at $19 billion. Meanwhile, Johnnie Walker ranked 6th with a brand value of $10.5 billion.

Source: Kantar BrandZ Most Valuable Global Brands 2024

To put things into perspective and better understand what each of the seven companies we’re analyzing owns, here’s a breakdown in table form:

As seen, Anheuser-Busch InBev and Diageo have the strongest portfolios in terms of brand value.

c. Industry Developments

Tailwinds

For completeness, key tailwinds include growth in non-alcoholic beverages, new small packaging (Diageo’s "Architecture" concept), that supports moderation and affordability, and premiumization. According to IWSR, the no-alcohol market across the top 15 markets is expected to grow at a +5% volume CAGR (2023-2028), with beer at +6%, wine at +5%, and spirits at +10%. In the US, no-alcohol spirits are the fastest-growing segment within the broader spirits category, with a +60% five-year CAGR through 2024, outpacing the growth of no-alcohol wines and beers.

Headwinds

As previously mentioned, the industry faces several structural headwinds, including GLP-1 drugs, Gen Z’s preferences, and alcohol moderation. According to Bevtrac data, 50% of consumers moderating their alcohol consumption are driven by prioritization of wellbeing, 30% are influenced by economic factors, and 20% by health concerns. Additionally, regulation and tariffs remain key risks for the industry.

During Diageo’s latest earnings call, an analyst raised questions about these structural headwinds and management provided the following insights:

• Gen Z (born 1997-2012) shows a preference for moderation, but household penetration is at +3%, with Gen Z adopting moderation faster than Millennials. This is also evident in the trend of "zebra stripping", alternating between alcoholic and non-alcoholic drinks within the same evening.

  • Beverage companies with strong non-alcoholic portfolios (e.g., Diageo’s 0.0 Guinness) are well-positioned to benefit from this trend.

• On GLP-1, Diageo acknowledged that it’s still early to measure its impact. While there’s some data available, they believe it’s difficult to distinguish the effects of GLP-1 from the broader moderation trend that has been ongoing for decades. For premium spirits, where the industry (especially big players) is focused, the impact is deemed minimal.

Tariffs, affect all companies, especially in the tequila and Canadian whisky segments. With 45% of Diageo's US net sales reliant on spirits sourced from these regions, pricing and proper inventory management are crucial. While they might have passed on price increases in the past, it’s uncertain if they can do so at scale again, especially since consumer prices are already quite high.

Additionally, a recent NCSolutions survey found a 36% increase in participation for Dry January this year, and 49% of Americans plan to reduce their alcohol consumption in 2025, marking a 44% increase from 2023. Notably, 39% of Gen Z plans to stay alcohol-free throughout the year, compared to just 19% of Millennials/Gen X and 10% of Boomers. However, given the small sample size of 1,131 US adults, the actual long-term behavior of Gen Z remains uncertain.

Finally, regulation is a growing risk within the alcoholic beverage industry. Many countries have adopted stricter policies on alcoholic beverage advertising, putting increasing pressure on key industry players due to rising costs and administrative burdens.

To conclude, the headwinds facing the industry significantly outweigh the tailwinds, thus investing in these companies comes at a risk. However, it is worth noting that many of these companies are currently trading at their lowest valuation levels.

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3. Key Metrics

Revenue Growth

No clear winner emerges, as all companies experienced a decline during COVID followed by a recovery. Over the five-year period, Carlsberg ranks first, having avoided negative territory for an extended time. Although not reflected in the Koyfin chart for the full year 2024, it achieved 2.4% organic revenue growth, outperforming the rest. Heineken follows, benefiting from higher growth, with ABI close behind; both showing more stability but dipping into negative territory recently. STZ ranks fourth, trailing slightly.

Among the rest, Diageo's decline has stabilized, but credit is due to BFB for remaining in positive territory longer than Diageo. Overall, beer companies performed better, further underscored by Diageo’s Guinness, which marked its eighth consecutive half-year of double-digit growth. One reason for the lag in spirits is consumer trade-down behavior driven by economic uncertainties.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Profitability

Although revenue has been volatile, profitability has remained relatively stable for key market players. Constellation Brands leads the competition with a 34% EBIT margin and consistently higher margins over the five-year period, while Diageo follows closely in second place with an approximate 29% margin, though recently declining. The chart also highlights that spirits companies generally have higher margins than beer companies due to premiumization, with BFB and Pernod Ricard following this trend. The exception is Constellation Brands, which, despite having ~75% of its sales in beer, maintains beer margins of ~38%, showcasing clear operational efficiencies.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Asset Turnover

Carlsberg and STZ demonstrated the best recent trends in asset turnover ratio (revenues/total assets), reflecting improved asset efficiency. In terms of rankings, Carlsberg takes the top spot with the highest ratio, followed by Heineken and Brown-Forman. Diageo ranks fourth, showing better asset efficiency than five years ago but still at a modest 0.4x.

One limitation of this ratio, without deeper analysis, is that companies investing heavily in acquisitions may see their asset base grow without a proportional increase in revenue, while subsequent impairments (though indicative of poor capital allocation) can artificially boost the ratio. This is why observing trends over time is key to a proper assessment.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Returns on Capital

As noted in our previous industry overviews, Return on Capital (ROC) is, in our view, one of the most critical metrics for assessing a company's ability to convert capital into profit and a strong indicator of capital allocation efficiency. On a last-twelve-month basis, Diageo ranks first with a ROC of 10.5%, an improvement from five years ago. While BFB’s ROC is similar at 10.3%, its declining trend, aligned with falling profitability and asset turnover, raises concerns, placing it second. STZ and Carlsberg follow, both showing a promising upward trajectory.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Debt to Equity

Diageo has the highest debt-to-equity ratio among peers at 182%, posing the greatest financial risk. This increases the likelihood of a dividend cut, though the company recently announced it would keep dividends flat, while also halting share repurchases in the last half. Another risk is the potential need to dispose of assets to fund growth or acquire new brands. This is why rumors about possible sales in Guinness and stake in Moët Hennessy (which management denied, fortunately, given Guinness' strong growth) generated some optimism among investors.

On the other end, Heineken holds the best position, with a steady decline in leverage over the past five years, now at 76%. It is followed by Pernod Ricard (RI), which has maintained a stable leverage ratio at 79%. BFB and ABI rank third and fourth at 86.5% and 87.7%, respectively, both showing deleveraging from five years ago.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Valuation

Using the EV/EBITDA metric, which indicates a business's relative valuation, we see that the industry is trading well below its 5-year average EV/EBITDA (NTM) due to the overall alcohol moderation trends. Carlsberg has the lowest multiple at 7.5x (not shown in the chart due to Koyfin’s limitations) compared to its 5-year average of 10.4x, while Brown-Forman has the highest ratio at 13.6x but also the largest deviation (10.8x) from its 5-year average of 24.4x.

As this analysis looks at the ratio in isolation, since factors like moat, financial health, and earnings quality are assessed in the metrics we looked earlier, we rank them based on deviation from their 5-year average. BFB ranks first with a 10.8x deviation, followed by STZ at 5.2x (15.4x – 10.2x), RI at 4.6x (15.8x – 11.2x), and Diageo at 4.3x (17.3x – 13x).

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Estimated EPS growth

Finally, we examine analysts' EPS growth expectations over the next five years. While the chart reflects how expectations have evolved over time, the key focus is on future growth. Based on the latest estimates, Carlsberg leads with 10.5%, followed by ABI at 9.7%, STZ at 9.1%, and Heineken at 8%.

On another note, spirits companies like Diageo and Brown-Forman, which previously faced negative and declining growth expectations, are now seeing upward revisions, whereas Pernod Ricard remains a laggard.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

4. Total score & Conclusion

Note: In each category, we assign 3 points to the top-ranked company, 2 points to the second, 1 point to the third, and 0.5 points to the fourth. Equal weighting is applied across all categories to mitigate personal biases, except for Returns on Capital, which we consider one of the most critical ratios in assessing a company. Therefore, we've doubled the score for this metric.

Based on our findings, there is no clear-cut winner among Diageo (DGE), Brown-Forman (BFB), Constellation Brands (STZ), and Carlsberg (CARLB). However, if we had to highlight one company for further analysis, it would be Carlsberg, as it ranked first in three metrics and showed an improving trend in Returns on Capital, narrowly trailing the top performers.

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At StockOpine, we conducted a deeper dive into Diageo. If you're interested in learning more, here are a couple of links that might be of interest.

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Disclaimer: The team does not guarantee the accuracy or completeness of the information provided in the newsletter. All statements express personal opinions based on own financial and business analysis. Any estimates or forward looking statements made are inherently unreliable. No statement of opinion is an offer or solicitation to buy or sell the financial instruments mentioned.

The content of our newsletter is not a trading or investment advice and we do not provide any personal investment advice tailored to the needs of any recipient. The information provided should not be considered as a specific advice on the merits of any investment decision. Securities trading involve risk and you might lose your capital and/or incur other damages. Investors should make their own research and consult their registered investment advisor or financial advisor before taking any investment decision.

Neither the team nor any of its affiliates accept any liability whatsoever for any direct or indirect loss however arising, from any use of the information contained herein. Any unauthorized copy of this newsletter or its contents is illegal.

Our posts may contain affiliate links, which means that we might get a commission if you decide to sign-up using any of these links. No extra cost is charged to you.

By subscribing / reading our newsletter or any affiliated social media accounts, you indicate your unconditional acceptance to the above and your unconditional acceptance to our terms and conditions.

This month’s edition dives into a company thriving in a fragmented industry where two key players dominate the market. Over the past decade, this company has delivered remarkable shareholder returns of +465% (a CAGR of ~18.9%), closely aligned with its revenue growth of 18.2% and net income CAGR of 18.6%.

So, which company is it?

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1. Leslie’s ($LESL) - Market Cap: $ 395M

The business

Leslie's is the largest direct-to-consumer pool and spa care brand in the United States. It operates over 1,000 physical locations and e-commerce platforms, selling a wide array of supplies and services including chemicals, equipment, parts, and cleaning accessories. Leslie's serves both residential and professional clients, with a significant portion of sales coming from DIY customers.

The company has a vast store network located within 20 miles of 80% of US pools; a strong loyalty program with 8 out of 10 DIY customers as members; and exclusive brands and custom-formulated products, accounting for over 55% of total sales.

From FY18 to FY24, the company achieved a revenue Compound Annual Growth Rate (CAGR) of 6.9% while its operating income declined from $116 million (13% operating margin) to $67 million (operating margin of 5%). Leslie’s has debt and lease liabilities of $1.05 billion compared to cash and short-term investments of $109 million.

Source: FinChat.io (affiliate link with a 15% discount for StockOpine readers)

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Valuation multiples

Its stock price is $2.14 with a 52-week high of $8.21 and a 52-week low of $2.02. The stock price year-to-date (YTD) performance stands at negative -69%.

Leslie’s trades at an EV/EBITDA (NTM) of 10.7x (4 Year average of 14.8x) and at an EV/Sales (NTM) of 1.0x (4 Year average of 2.5x).

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Challenges

Leslie's stock has collapsed by 90% since its IPO in 2020, primarily due to a confluence of post-pandemic challenges. The company benefited from a pandemic-fueled boom in pool installations and increased spending, but this was followed by a normalization of demand, higher interest rates, and a reduction in consumer spending on large-ticket items. Additionally, supply chain issues and a chlorine shortage led to price increases, which subsequently reversed, negatively impacting sales and profitability.

Inventory build-up and misjudged chemical pricing by the former management team further exacerbated the issues. Consequently, Leslie's gross margin fell from a peak of 41% in FY21 to 35.8% in FY24 and total revenue in FY24 decreased by 15% from its peak in FY22.

Furthermore, high debt of $777 million compared to cash and short-term investments of $109 million creates a challenging financial position.

Catalysts

Despite the recent challenges, several catalysts suggest a potential for stock appreciation. First, comparable sales have shown improvement in Q3 and Q4 of FY24 and management has guided for further improvement in Q1 FY25. Second, the professional (PRO) consumer group is demonstrating resilience, with increasing sales, and the company is converting more stores to the PRO format to capitalize on this trend. Third, chlorine prices have stabilized, and inventory has been reduced, helping to normalize the impact of prior pricing actions and reduce storage costs. Finally, new management with extensive experience is in place, focused on operational improvements and cost reduction.

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With the S&P 500 at an all-time high, identifying compelling investment opportunities can be challenging. That’s why we’re highlighting three stocks below that we believe deserve your attention. Each of these companies boasts strong fundamentals and, in our view, trades at an attractive valuation.

1. Alphabet Inc. (GOOGL)

Sector: Technology | Current Price: $169 | Market Cap: $2.06 trillion

• Why We Like It: Alphabet dominates the search engine space with 89.3% market share through Google Search. YouTube with an estimated 2.7 billion monthly active users is the largest streaming platform globally, reaching $50 billion in annual revenue as of Q3’24. Of which, YouTube’s subscription revenue surged to $15 billion annually, up approximately 36% since Q1’23. Google Cloud is also rapidly expanding revenue and profitability. With cloud computing expected to reach $2.4 trillion by 2030, growing at a CAGR of 21.2%, Google Cloud with a Trailing Twelve Month revenue of $40.4 billion has ample room for growth.

Source: FinChat.io (affiliate link with a 25% discount for StockOpine readers)

• Key Catalysts: Alphabet is integrating AI into Search through features like "Circle to Search," expanded Lens capabilities, and AI Overviews. This will help Alphabet maintain its relevance in Search without compromising monetization. Alphabet’s advertising revenue is projected to grow at a 10% annual rate, consistent with the expansion of the global digital advertising market. Google Cloud is set to outpace peers in growth due to its smaller base, with EBIT margins expected to reach 25–30% by 2028.

• Valuation Insight: Alphabet trades at a TTM EV/EBITDA ratio of 15.8x (5-Year average of 17.6x) and a TTM Price / Earnings ratio of 22.5x (5-Year average of 27.0x).

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The metrics included, among others, a deviation from the 52-week high—a rather contrarian approach—but also accounted for important parameters such as returns on capital and estimated revenue and profitability growth.

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Screening outcome

Source: Koyfin (get 20% off if you use our link) | Note: The screening criteria are visible in the image above (click to enlarge).

Do the largest three names sound familiar? Let's take a glimpse at them.

1. Monster Beverage Corporation (MNST)

a. Company Overview

Monster Beverage Corporation, founded in 1985 and headquartered in Corona, California, is a leading developer, marketer, and distributor of energy drink beverages and concentrates. The company operates through three main segments: Monster Energy Drinks, Strategic Brands, and Other. It offers a wide range of products including carbonated energy drinks, non-carbonated beverages, ready-to-drink iced teas, lemonades, juice cocktails, dairy and coffee drinks, sports drinks, and flavored sparkling beverages.

b. Revenue Segmentation

• Monster Energy Drinks: This segment is the largest, contributing approximately 91.81% of the total revenue with net sales of $6,555.09 million for the fiscal year ending December 31, 2023.

• Strategic Brands: This segment accounts for 5.27% of the total revenue with net sales of $376.59 million.

• Alcohol Brands: This segment contributes 2.59% of the total revenue with net sales of $184.86 million.

• Other: This segment accounts for 0.33% of the total revenue with net sales of $23.49 million.

Source: Finchat.io → 15% discount for StockOpine readers

c. Growth Rates

• Revenue Growth:

  • 3-Year CAGR: 15.37%

  • 5-Year CAGR: 13.47%

  • 10-Year CAGR: 12.31%

Source: Finchat.io → 15% discount for StockOpine readers

• EPS Growth:

  • 3-Year CAGR: 5.23%

  • 5-Year CAGR: 11.17%

  • 10-Year CAGR: 16.11%

Source: Finchat.io → 15% discount for StockOpine readers

d. Profitability Metrics

• Gross Profit Margin: 53.45%

• EBITDA Margin: 29.18%

• Operating Margin: 28.19%

• Net Profit Margin: 22.83%

• 5 Year Returns on Equity: 24.51%

e. Valuation Metrics (TTM)

• P/E Ratio: 30.81 (3Y average 40.2)

• P/B Ratio: 5.91

• EV/Sales: 6.4

• EV/EBITDA: 22.05 (3Y average 28.1)

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As previously mentioned, we perform this analysis to narrow down potential investment candidates before selecting a company for deeper research. For our subscribers, the benefit lies in idea generation.

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1. Key Competitors

Factset (Ticker – FDS): Factset is a financial data and software company offering workstations, portfolio analytics and enterprise solutions. With over 8,000 clients comprised of 190,000 investment professionals, Factset’s clientele include asset managers, bankers, hedge funds and many more.

Bloomberg L.P: Bloomberg is the global leader in the financial data and analytics sector, with its flagship product being the Bloomberg Terminal, with over 350,000 users worldwide. The platform is considered the go-to for buy-side analysts, trading desks and asset managers.

Refinitiv (Ticker – LSEG): Refinitiv’s product is arguably the most versatile, used by investors, banks, trading desks, corporations and many more. Refinitiv is considered to be the most reputable platform within the M&A space due to its powerful deal screening tool.

S&P Global (Ticker – SPGI): S&P’s Capital IQ is recognized as the industry’s leader regarding financial datasets, providing users with extensive financial analysis and non-GAAP financials that are particularly useful to investment bankers.

MSCI (Ticker – MSCI): A global powerhouse, providing indices for equities, fixed income and real estate, in addition to Barra, a financial analysis and portfolio management tool.

Morningstar (Ticker – MORN): Morningstar comprehensive offerings include tools and services for investment research and investment management, with offerings such as ‘Morningstar research portal’ and ‘Morningstar Advisor Workstation’.

Source: Koyfin, StockOpine analysis, Data as of 4 June 2024

2. Market size and forecasts

According to IbisWorld, the market size, measured by revenue for the Financial Data Service Providers industry in the US was $22.1 billion in 2023 and has grown at a Compound Annual Growth Rate (“CAGR”) of 4.5% between 2018-2023.

According to Koyfin, FactSet’s revenue is expected to grow to $2.2 billion (5.6% YoY change) for FY24, $2.34 billion (6.1% YoY change) for FY25, and $2.49 billion (6.5% YoY change) for FY26. For S&P Global, analysts expect revenues to grow at 7.6% for FY24, 7.7% for FY25, and 7.8% for FY26. For LSEG, growth rates are projected to be 4.0% for FY24, and 7.4% for both FY25 and FY26. These estimates indicate that the industry is expected to maintain mid-single-digit growth in the years ahead.

Market Share

The Bloomberg Terminal is undoubtedly the market leader within the industry. However, due to Bloomberg being privately owned, metrics are unavailable for comparison. WallstreetPrep estimates the market share of the Bloomberg Terminal to be roughly 33.4%, with a significant lead over Refinitiv, which is in second place with 19.6%. S&P’s Capital IQ holds roughly 6.2%, and FactSet has roughly 4.5%.

As mentioned in our Factset writeup, FactSet’s key strength lies in its affordability, priced at just $12,000 a year compared to $27,660 and $22,000 for Bloomberg and Refinitiv (full version), respectively. This positions FactSet in the market as the affordable ‘all-under-one-roof’ platform.

Industry Tailwinds

Companies within the financial data and analytics sector benefit greatly from general uptick into passive investing, with the use of exchange-traded funds. MSCI for example, is a large player in the ETF industry, along with other players that are involved in the financial data and analytics space, such as Blackrock, Nasdaq, S&P Global and many more.

This segment of MSCI is highly profitable, however, for companies such as Factset this could be negative in the long run, as the move from active to passive could mean less need for the products offered by Factset that are tailored to active investment managers.

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3. Key Metrics

The comparison below is not necessarily apples-to-apples, as FactSet’s key competitors (excluding Bloomberg, which is privately owned) are owned by parent companies with much larger and differentiated product offerings. For example, Refinitiv is owned by the London Stock Exchange Group (LSEG), and Capital IQ is owned by S&P Global (SPGI).

Revenue Growth

MSCI revenue growth stands out, despite LSEG’s spike in revenues due to the acquisition of the Refinitiv platform in 2021. Morningstar follows closely while Factset ranks fourth, with 6% growth over the last fiscal quarter. From the chart, it is evident that the growth rates of these peers move in tandem.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Profitability

Factset has shown stable and resilient profitability, ranging from 29%-31.2% over the past five years, compared to significant decreases in LSEG’s and S&P’s profitability between 2021-2022. LSEG’s acquisition of Refinitiv in 2021 negatively affected profitability, despite revenues tripling for FY22 compared to FY21. MSCI ranks far ahead of the competition with an EBIT margin of just under 54%, due to its highly profitable equity index element.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Asset Turnover

Over the past year, Morningstar has surpassed FactSet’s asset turnover, indicating that it utilizes its assets more efficiently to generate revenue. However, FactSet has had the edge for the majority of the five-year period and has demonstrated a relatively stable trend, though it was affected by acquisitions like the CUSIP one in FY22. SPGI’s and LSEG’s asset turnover is significantly lower due to major acquisitions, such as SPGI’s merger with IHS Markit and LSEG’s acquisition of Refinitiv. It is important to note that LSEG's ratio is impacted by the clearing member trading assets, which inflate the asset base. Excluding this, the asset turnover is estimated to be around 0.2x, down from 0.3x in FY21.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

🎁 Premium members can benefit from a 3-MONTH FREE TRIAL on the Koyfin platform. This translates to a value of $147, covering your subscription to StockOpine. To take advantage of this opportunity, please contact us at info@stockopine.com at any time. 🎁

Returns on Capital

Although declining, FactSet’s return on capital (ROC) remains ahead of its largest competitors, at 12.1%. The decline is mainly attributed to a decrease in asset turnover affected by acquisitions. The same can be said for S&P, which has shown a massive drop in 2022, bringing its ROC far below FactSet’s but still above LSEG’s and MORN's. Nonetheless, MORN has exceeded SPGI in the latest quarter. MSCI has shown a clear edge, with increasing returns on capital year-over-year, remaining above 20%.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Debt to Equity

The debt-to-equity ratio is a key gearing ratio that indicates a company's debt appetite and bankruptcy risk, though it should not be used in isolation. Since our FactSet write-up in June 2023, FactSet has substantially decreased its debt, almost halving its debt-to-equity ratio. However, it still has the highest ratio at 94.6%, slightly above MORN, which also shows a declining trend.

SPGI and LSEG have low and healthy ratios, ranking 1st and 2nd, respectively. MSCI is not included in the below chart due to having negative equity. MSCI is highly leveraged, and if we examine its total debt to total capital, it has a ratio of 116.2% compared to 48.6% for FactSet, thus we rank it last.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Valuation

Using the EV/EBITDA metric, a key ratio to indicate the relative valuation of a business, we note that MSCI, LSEG, and FactSet are trading below their five-year average, with FactSet trading at 18.9x, above LSEG’s 13.9x, but below the remaining peers. The 22.5x five-year average for FactSet could potentially indicate that the company is trading at a discount. Similarly, MSCI, at 25.4x, shows a considerable difference from its five-year average of 31.1x. We rank FactSet as first, followed by LSEG and MSCI.

It's essential to recognize that this ratio should never be evaluated against peers without considering factors such as moat, financial health, and earnings quality. However, the total score below serves this purpose.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Estimated EPS growth

FactSet’s projected 5-year EPS growth is the lowest among its peers, with rivals such as SPGI and MSCI leading the pack with growth rates of 13.3% and 11.7%, respectively. For Morningstar, there are no available metrics, but a single analyst projects an EPS increase of 37.5% in FY24, 17.2% in FY25, and 19% in FY26. Although these projections are higher than SPGI's, we will rank Morningstar as second due to the limitation of having only a single analyst's estimate. Overall, it is impressive to note that all peers are projected to grow their EPS at almost double-digit rates.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

4. Total score & Conclusion

Note: In each category, we assign 3 points to the top-ranked company, 2 points to the second, 1 point to the third, and 0.5 points to the fourth. Equal weighting is applied across all categories to mitigate personal biases, except for Returns on Capital, which we consider one of the most critical ratios in assessing a company. Therefore, we've doubled the score for this metric.

Based on our analysis, FDS ranks second, tied with SPGI, while MSCI appears to be the best-performing company based on the metrics used. It is evident that MSCI’s index business helps maintain high profitability and attractive returns on capital.

If you are interested in learning more about FactSet, you can refer to the article published in June 2023 (FactSet - Unleashing the Power of Data).

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Disclaimer: The team does not guarantee the accuracy or completeness of the information provided in the newsletter. All statements express personal opinions based on own financial and business analysis. Any estimates or forward looking statements made are inherently unreliable. No statement of opinion is an offer or solicitation to buy or sell the financial instruments mentioned.

The content of our newsletter is not a trading or investment advice and we do not provide any personal investment advice tailored to the needs of any recipient. The information provided should not be considered as a specific advice on the merits of any investment decision. Securities trading involve risk and you might lose your capital and/or incur other damages. Investors should make their own research and consult their registered investment advisor or financial advisor before taking any investment decision.

Neither the team nor any of its affiliates accept any liability whatsoever for any direct or indirect loss however arising, from any use of the information contained herein. Any unauthorized copy of this newsletter or its contents is illegal.

Our posts may contain affiliate links, which means that we might get a commission if you decide to sign-up using any of these links. No extra cost is charged to you.

By subscribing / reading our newsletter or any affiliated social media accounts, you indicate your unconditional acceptance to the above and your unconditional acceptance to our terms and conditions.

Personally, we conduct this analysis to narrow down potential investment candidates before selecting a company for deeper research. For our subscribers, the benefit lies in idea generation.

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In our first issue, we're delving into the industry of Autodesk, focusing on software solutions for Architecture, Engineering, Construction, Building Operations, and Manufacturing sectors.

1. Key Competitors

Autodesk (Ticker - ADSK): Autodesk, Inc. is a global leader in 3D design, engineering and entertainment technology solutions, spanning architecture, engineering, construction, product design, manufacturing, media, and entertainment. Its flagship product is AutoCAD.

Nemetschek (Ticker – NEM.DE): Nemetschek SE provides software solutions for architecture, engineering, construction, media, and entertainment markets in Germany, rest of Europe, the Americas, the Asia Pacific, and internationally. It operates through four segments: Design, Build, Manage, and Media.

Dassault Systemes (Ticker – DSY.PA): Software Corporation which develops software for 3D product design, simulation, manufacturing and other 3D related products.

Procore Technologies (Ticker - PCOR): Procore Technologies, Inc. engages in the provision of a cloud-based construction management platform and related software products in the United States and internationally. The company’s platform enables owners, general and specialty contractors, architects, and engineers to collaborate on construction projects.

Trimble Inc. (Ticker – TRMB): Trimble Inc. provides technology solutions that enable professionals and field mobile workers to enhance or transform their work processes worldwide.

PTC Inc. (Ticker - PTC): PTC is a global software company that provides a portfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and serviced. Its software portfolio includes offerings such as computer-aided design (CAD) solutions and product lifecycle management (PLM) portfolio solutions.

Bentley Systems (Ticker – BSY): Bentley Systems, Incorporated, provides infrastructure engineering software solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific.

Source: Koyfin, StockOpine analysis, Data as of 12 April 2024

2. Market size and forecasts

According to Cambashi, a market research and intelligence platform referenced by both Autodesk and Nemetschek in their estimates, Building Information Modelling (“BIM”) market software market is forecasted to reach $30.7B by 2027, up from ~$17.8B, representing a Compound Annual Growth Rate (“CAGR”) of 11.5% for the period 2022-2027.

Meanwhile Custom Market Insights, projects a (“CAGR”) of approximately 9.7% for Architecture, Engineering, and Construction (AEC) Software Market over 2023 to 2032, driven by the increasing demand for efficient and collaborative software solutions in the AEC industry. The market size is estimated at $9.17 billion and is expected to reach $21.9 billion by 2032.

In addition to construction software, another relevant market for Autodesk is manufacturing software, encompassing Computer-Aided Design (CAD), Computer-Aided Engineering (CAE), Computer-Aided Manufacturing (CAM), Manufacturing Operations Management (MOM), and Product Lifecycle Management (PLM). Cambashi estimates that this sector will reach $28.1 billion in 2024, marking a 9.3% increase from $25.7 billion in 2023. Key players in the manufacturing segment include Autodesk, Dassault, PTC, and Siemens.

These forecasts indicate that despite the market's size, growth remains robust, and with even slight gains in market share, industry leaders can sustain double-digit growth rates in the coming years.

Industry tailwinds

The Infrastructure Investment and Jobs Act of 2021 allocates $1.2 trillion for transportation and infrastructure spending. Additionally, the Inflation Reduction Act, amounting to $780 billion, offers tax cuts and investment incentives for companies shifting towards Electric Vehicle and battery production in the US, while the US and EU Chips Act, totaling $280 billion and €43 billion, respectively, provide further support. These initiatives/directives are set to benefit the software industry.

Moreover, gen AI and machine learning (ML) are expected to positively impact these companies in the long run. By enhancing labor productivity, optimizing design efficiencies, and addressing constraints—whether regulatory or customer-driven—these technologies are poised to drive further advancements in the industry.

3. Key metrics

Revenue Growth

Procore stands out as the undisputed leader in growth rates, significantly expanding its revenues from $289 million in 2019 to $950 million in FY23. PTC follows behind Procore, albeit with some volatility. Autodesk ranks third, demonstrating a smoother and upward trend in recent periods, particularly following its transition to annual billings.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

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Profitability

Procore was omitted from this chart due to its negative profitability, which skewed the data. Despite PTC closely trailing and leading in recent quarters, Nemetschek is ranked as the leader. With Nemetschek's transition to a subscription business model and its higher media mix (looking at Adobe one can understand the difference in margins – average at 36% over the last 5 years), we anticipate its continued leadership. Dassault exhibits strong and stable margins, while Autodesk's upward trajectory is also noteworthy.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Asset Turnover

Nemetschek leads the pack, by better leveraging its assets to generate sales, closely trailed by Autodesk. The two exhibit stability in their performance. While Trimble and Procore share a similar ranking due to Trimble's consistency and Procore's strong position despite the rapid growth levels, we place Procore in the third spot.

Bentley Systems' trajectory illustrates the impact of overpriced acquisitions on returns on capital and efficiency. Recent acquisitions, such as Seequent in June 2021 for $883 million (+ shares) and Power Line Systems in January 2022 for $696 million, have increased its debt and capital without a proportional impact on profits.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Returns on Capital

When considering Returns on Capital, both Nemetschek and Autodesk are equally attractive, yet Autodesk holds the top position. While we don't anticipate significant shifts between the two, occasional changes in position may occur. Ranking third is PTC, which, despite ceding ground to Dassault in the last quarter, has demonstrated greater stability over recent years. This metric stands out as one of our favorites, incorporating profitability, asset efficiency, and capital allocation prowess. Given that Nemetschek and Autodesk boast returns at least double those of their peers, we've chosen to double the scoring below.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Debt to Equity

Debt to Equity is a crucial metric for investors, providing insight into a company's risk of bankruptcy (though it should never be used in isolation). From the chart below, Procore is the leader, closely trailed by Nemetschek. None of the companies shows weakness, as all ratios appear healthy, with those displaying higher leverage showing a downward trend over time.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

Valuation

Procore was excluded from the chart due to its next twelve months (“NTM”) EV/EBITDA ratio of 75x, which would have distorted chart’s clarity. From our perspective, Autodesk, with a ratio of 22.4x, offers the most attractive valuation compared to its 5-year average and the multiples of its peers, where Bentley and Nemetschek appear relatively pricey. While we rank the companies based on their current ratio versus their 5-year average and their peers, it's essential to recognize that this ratio should never be evaluated against peers without considering factors such as moat, financial health, and earnings quality. Here, we focus solely on the numerical comparison as we provide a total score below.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers), Note: The data was extracted on 12^th April 2024

Estimated EPS growth

Finally, we examine analysts' EPS growth expectations over the next 5 years. Procore was excluded as there are only 3-year estimates available from analysts, but with estimates of 128%, 42%, and 52% for the next 3 years, it is the clear number 1. PTC and Nemetschek secure the 2nd and 3rd positions with growth rates of 17.5% and 17.1%, respectively, followed by Autodesk at 14.9%. Please note that we only considered the latest available estimate.

Source: Koyfin (affiliate link with a 20% discount for StockOpine readers)

4. Total score & Conclusion

Note: In each category, we assign 3 points to the top-ranked company, 2 points to the second, 1 point to the third, and 0.5 points to the fourth. Equal weighting is applied across all categories to mitigate personal biases, except for Returns on Capital, which we consider one of the most critical ratios in assessing a company. Therefore, we've doubled the score for this metric.

Based on our analysis, Autodesk and Nemetschek are the most compelling companies. If you're interested in learning more about Nemetschek, you can refer to the article we published in October 2023 (Nemetschek's Transition to a Subscription-Based Model). As for Autodesk, we have an article from May 2022 (Autodesk Deep Dive), although it's somewhat outdated and in a different format from our current reports. Procore is also noteworthy, but we don’t really like companies with operating losses.

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Disclaimer: The team does not guarantee the accuracy or completeness of the information provided in the newsletter. All statements express personal opinions based on own financial and business analysis. Any estimates or forward looking statements made are inherently unreliable. No statement of opinion is an offer or solicitation to buy or sell the financial instruments mentioned.

The content of our newsletter is not a trading or investment advice and we do not provide any personal investment advice tailored to the needs of any recipient. The information provided should not be considered as a specific advice on the merits of any investment decision. Securities trading involve risk and you might lose your capital and/or incur other damages. Investors should make their own research and consult their registered investment advisor or financial advisor before taking any investment decision.

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The question we aim to answer is: Why does margin expansion often lead to multiple expansion?

response:

We believe that margin expansion often leads to multiple expansion because it demonstrates improved operational efficiencies for a company. When a company's margins consistently expand, especially when compared to its peers, it signals a sustainable business model, indicative of a competitive advantage or a 'moat’.

This heightened profitability attracts investors, resulting in increased demand for the company's stock. Consequently, the market assigns a higher valuation multiple to the stock, reflecting the improved potential for future earnings growth. Over time, as future sustainable profits catch up to the higher multiple, the valuation multiple will appear more in line with the quality of the company.

As history suggests (as depicted in the screenshot from the Morgan Stanley article below, which is a recommended read), profit expansion is equally crucial as multiple expansion for the total returns of a stock over the long term. We believe that earnings expansion serves as a signal of optimism, prompting investors to incorporate higher growth expectations into the stock price, thus driving the multiple higher.

Source: Morgan Stanley Investment Management, Total Shareholder Return

Caveats: Investors might get greedy with minor or unsustainable profit expansion, and thus what causes the price to go up will eventually drag it out. So do your research to better evaluate the reasons.

response:

I’ve been researching high quality companies, so called compounders, for over two years. Often over the last decade, these businesses showed:

• Stable mid- to high single-digit revenue growth

• Margin expansion

• Increasing Returns on Capital

• Teens EPS growth

• 20%+ Total return growth

Below we can see the examples of Cintas Corporation CTAS 0.00%↑, IDEXX Laboratories IDXX 0.00%↑ and Mettler-Toledo MTD 0.00%↑.

These businesses crushed the market by pushing all the levers a company has to pull to increase EPS and total returns faster than revenue:

• Reducing shares outstanding

• Pushing margins

• Multiple expansion by the market

The question now arises if these businesses have seen their best days and if the market is rational in pricing them higher.

Answer

It makes sense that the market is willing to put a premium on companies with higher ROIC, a decreasing share count and higher margins. They often demonstrated a long history of outperformance and continual improvement in fundamentals and total returns. It is easy to get drawn into the past and experience FOMO.

The issue is that these companies often already exhausted a lot of the levers they can pull. Improving margins can supercharge returns over a long time. Pushing profit margins from 7.5% to 15% can be easy on a 50% gross margin business, but going from 15% to 30% is pretty hard. Both represent the same amount of leverage on earnings growth.

A similar issue can be observed with share buybacks: As the multiple increases, the buyback yield declines. A company trading at a 5% FCF yield can retire 5% of shares without taking on debt, while a company trading at a 2% FCF yield can only retire 2% a year. This massively reduces the effectiveness of the buyback lever on earnings growth.

Lastly, multiple expansion is a tool that no company can control, but here also, at some point, this becomes a headwind. A company going from a 15 PE to a 30 PE will enjoy tremendous share price appreciation. It is, however, unlikely to go from 30 PE to 60 PE.

To justify its growth based on an inverse DCF model, the company needs to accelerate growth and after these levers are pulled, it needs to come out of organic growth. Often, these businesses already have a strong market position. To accelerate top-line growth, they need to invest more cash, decreasing margins and cash to buy back shares. Sadly, that’s why many great businesses trade at lofty multiples and might not make great investments going forward. It is key for investors to stay rational and not get focused on the past. Only forward returns matter.

If you enjoyed this format and would like to see similar posts in the future, please hit the like button, share your comments, and be sure to subscribe to Niklas's newsletter.

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Disclaimer: The team does not guarantee the accuracy or completeness of the information provided in the newsletter. All statements express personal opinions based on own financial and business analysis. Any estimates or forward looking statements made are inherently unreliable. No statement of opinion is an offer or solicitation to buy or sell the financial instruments mentioned.

The content of our newsletter is not a trading or investment advice and we do not provide any personal investment advice tailored to the needs of any recipient. The information provided should not be considered as a specific advice on the merits of any investment decision. Securities trading involve risk and you might lose your capital and/or incur other damages. Investors should make their own research and consult their registered investment advisor or financial advisor before taking any investment decision.

Neither the team nor any of its affiliates accept any liability whatsoever for any direct or indirect loss however arising, from any use of the information contained herein. Any unauthorized copy of this newsletter or its contents is illegal.

Our posts may contain affiliate links, which means that we might get a commission if you decide to sign-up using any of these links. No extra cost is charged to you.

By subscribing / reading our newsletter or any affiliated social media accounts, you indicate your unconditional acceptance to the above and your unconditional acceptance to our terms and conditions.

Today’s article comes from , co-host of the The Investing for Beginners Podcast and co-author of einvestingforbeginners.com.

We crossed paths with Dave over a year ago and since then, he has become our favorite FinTwit creator (@IFB_podcast). Dave shares educational content tailored for beginner investors, using simplified language that makes it easy to grasp essential concepts. Occasionally, he also shares company analyses that are accessible to newcomers in the investment world. His work is topnotch and we encourage you to explore it.

Today’s article (estimated read time ~50 minutes) delves into the payment stack, an area where investors often find themselves confused due to the various definitions circulating within the payment space. This article aims to provide clarity by outlining the 5 essential stages of the payment flow, assisting you in identifying the key players in each stage and concludes with valuable insights from Dave on the future of payments.

The Future of Payments: Understanding the Payment Stack

Analysts expect global payment revenues to grow to $3.3 trillion by 2026, according to McKinsey, after returning to their historical 6 to 7 percent growth rate following the pandemic, which saw drops in global payment revenues of 5 percent to $1.9 trillion in 2020.

Source McKinsey 2022 Global Payments Report

The future of payments continues to evolve, and many believe that cash is dead. The trend towards electronic payments only accelerated during the pandemic, a change already underway.

Many investors have taken advantage of this change by jumping on board the payments train by investing in such companies as PayPal (PYPL), Square (SQ), Visa (V), and Mastercard (MA), among countless others.

The payments space remains crowded, competitive, and the pace of change continues to accelerate.

In today's post, I wanted to unpack some players to understand who is who and why they continue to grow in relevance.

Today we will discuss the different terminology and how they interact along the payment processing chain so you can better understand the economics of that chain, along with any investment opportunities.

It can get a little confusing with terminology such as payment processors, merchant banks, issuing banks, interchange fees, and payfacs, to name a few.

But, after reading today's post, you will better understand.

1. How Payments Work

2. Understanding the Fees Earned in Payments

3. The Payment Stack

4. Players in the Stack

5. Future of payments

1. How Payments Work

Credit Suisse estimated in 2020 that the total opportunity, or TAM (total addressable market), for global payments totals $240 trillion across card payments, with the greatest expansion in Asia/Pacific, Latin America, and Eastern Europe.

Source: Andreessen Horowitz Fintech Sales Vertical SaaS

That is a tremendous opportunity for a variety of players across the board.

So what is involved in payment processing?

Payment processing is the operation that occurs when we use a payment method such as a debit or credit to buy something online or in-person.

What does that look like when we swipe our card?

It revolves around a cycle from the buyer (us) to our bank and back to the merchant, with a few stops to ensure accuracy and fraud prevention.

The payment cycle begins with our decision to buy that present for our significant other for $100 from the jewelry store. The authorization process begins when we press the confirmation or buy button on the POS (point-of-sale) terminal or online.

Next, the merchant (jewelry store) forwards a request to the acquirer, which the acquirer passes along to the card scheme (Visa/Mastercard) associated with our debit/credit card.

The card scheme or Visa/Mastercard forwards that request to our card issuing bank (JP Morgan) and JP Morgan checks to ensure we have the $100 in our account to pay for the gift.

If we clear that hurdle, the confirmation is sent back through the loop to the jewelry store, which submitted the request originally.

Along that path, there are several players:

• Merchant (jewelry store)

• Acquirer (Fiserv)

• Card Scheme (Visa)

• Issuing bank (JP Morgan)

All of those above players split up the associated fees by enabling the above transaction, and each player gets a different slice of the pie.

For example, the merchant that charges us the $100 for the item receives back $98, and the acquirer, card scheme, and issuing bank divvy up the balance of the $2.

Next, let's cover the actual process more so we understand the process.

Card processing, either online or in the store, happens in three distinct processes:

• Authorization

• Settlement

• Funding

Let's first look at how cards are authorized:

1. The cardholder presents their card in person or virtually to a merchant in exchange for products or services. The request might come in the form of a card terminal in-store, POS (point-of-sale) system, or through the e-commerce gateway on the merchant's website. Payment processing can also occur through a merchant's mobile or in-app process.

2. Once the payment is received, the merchant sends an authorization request to the payment processor.

3. For example, the payment processor sends the request through the appropriate network, Visa or Mastercard. The payment eventually reaches the issuing bank.

4. The issuing bank makes the authorizations, including CVV numbers, validation, and expiration dates.

5. Then the issuing bank either approves or declines the transaction.

6. The issuing bank then sends the approval or denial back the way it came to the card association, merchant bank, and back to the merchant.

Pretty simple, huh?

An easy way to think about the flow is to visualize a highway. First, we get on the highway headed for our destination, in this case, the issuing bank. We get on our highway through a ramp (merchant processor); once on the highway, we choose which direction to go (credit card association, Visa/Mastercard); once we decide on the direction, we arrive at our destination, the issuing bank.

Now, let's look at a simplified settlement process and funding of card payments.

1. Merchants send authorized batches of transactions to their payment processor, often at the end of the business day or predetermined time.

2. The payment processor details the transactions to the card associations, who communicate the appropriate information to the issuing banks on their networks.

3. The issuing bank debits the cardholder's account for the transaction.

4. The issuing bank then transmits the funds to the merchant bank minus interchange fees.

5. The merchant bank deposits the funds in the merchant's account.

Pretty simple, huh? Considering this all happened overnight when it used to take days. It allows the merchant to get their money quicker, helping their cash flows.

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2. Understanding The Fees in Payments

The payment fees or that $2 is the slice of the pie that each component of the payment flow receives for their actions in the flow.

In many cases, it breaks down to pennies or fractions of pennies, but when you consider that Visa transacted over 258 billion transactions in 2022, and PayPal processed over 22.3 billion in 2022, those pennies will add up to substantial sums.

Graph courtesy of All Things Fintech

The total processing fees breakdown into three main groups:

• Interchange fee: the issuing bank takes the largest slice of the pie, called the interchange fee. These interchange fees will vary depending on various factors, such as the type of card used (credit/debit), industry, and sale amount.

Visa and Mastercard set the interchange fees, which they update bi-annually. At last check, there were well over 300 interchange fees and many breakdowns like this simple example; 2% of the sale volume + $0.10 per transaction.

For our example above, that would work out as $100 x 2% + $0.10 equaling $2.10.

• Assessment fees: the fees that the card schemes such as Visa and Mastercard charge for their services. Visa and Mastercard include the assessment fee in the interchange fee, and many confuse the interchange and assessment fee as the same.

The typical rate for the assessment fee is 0.10% + $0.02 per transaction, so returning to our jewelry store purchase would work out as $100 x 0.10% + $0.02 equaling $0.12.

They bundle the assessment fee with the interchange, meaning no additional fees to the merchant for processing a Visa/Mastercard card. The issuing bank (JP Morgan) pays Visa their assessment fee out of the interchange fee.

• Markup fee: this is the fee that the merchant acquirer or the payment processor charges the merchant for enabling the payment through their POS. The amount of the markup will depend on the type of industry, monthly processing volume, amount of sale, card type, and type of transaction (present or not present).

The typical structure for markup fees is a percentage of the sale plus a per-transaction fee. For example, 0.25% + $0.10; back to our example, $100 x 0.25% + $0.10 equals $0.35.

To further delineate the fees, both the interchange rate and assessment fee are non-negotiable, meaning that if you choose to process debit cards or credit cards with a Visa or Mastercard logo on the card, those fees are mandatory, and there are no negotiating them, with either your bank or Visa/Mastercard.

They are the cost of doing business if you are a merchant, and to allow payments; you need to accept both Visa and Mastercard branded cards because those are the cards your customers carry in their wallets, real or virtual.

The markup fees are the only negotiable fees, and you can work out different rates with the merchant acquirers or companies that help you process your electronic payments. Many acquirers offer different rates to get the merchant's business, from lower rates if you process higher volumes to different rates for online payments versus in-person checkouts.

Let's look at these economics in a chart to explain how this works for the different players along the chain.

At the end of the payment process, the jewelry store receives $97.55 after running the payment through the payment process, with the various players receiving their slice of the pie through the cycle.

Remember that the time from submitting payment to approval takes seconds, which is mind-boggling.

Remember that many fees, over 300, depend on what card you use and how that payment processes. For example, there are different rates for debit cards versus credit cards, and whether they process in-person or card-not-present.

These rates also depend on which bank issues the cards, the requirements behind the Durbin Amendment regulating debit card usage, and the fees charged.

Ultimately, you don't have to memorize every type of transaction and fee; instead, it is important to understand the process and flow, the economics behind the transactions, and how those economics drive the different players in the flow.

3. The Payment stack

There are five major players in the payment processing flow, some with different names, doing the basic job described in our jewelry store example.

Some players occupy more than one role in the payment processing flow, which can get convoluted, but I will try to clarify everything in a tidy box.

According to Worldpay, cards and digital wallets occupy more than 70% of e-commerce and 79% of in-store transactions, and across the payment value chain, there are five main players:

• Customer

• Merchant

• Issuer

• Acquirer

• Card network

Customer

Also known as the cardholder if they pay with a credit or debit card. Customers are the end-user who begin the payment processing chain by initiating the payment with the merchant. Customers gain from the convenience of using electronic payments for goods and services online or in-person, sometimes as rewards or cash-back on their purchases.

Think of the customer as the starting point of the payment cycle, and visualize yourself paying for your items at Target, online, or in person. We all know you can't get out of Target without spending at least $100.

Merchant

To accept any electronic payment, online or in-person, the business needs to open a merchant account. The merchant establishes an account with the acquirer to settle the funds or push the transaction through the cycle and back to Target.

Target gains from participating in that network by attracting and retaining customers with a fast and efficient checkout. Merchants are the customers at this point of the payment cycle; for example, Target uses acquirers to enable payments online or in-person to receive payments for their goods and services from us, the customer.

Examples of merchants abound, but here is a sample:

• Target

• Home Depot

• McDonald's

• Lululemon

• Reebok

• Kroger

Issuing Bank / Issuer

The issuing bank, or issuer, is the financial institution, typically a bank, that issues cards to the customers. The issuing bank provides either debit or credit cards and makes payments on the customer's behalf. The issuers also manage the payment authentication process, ensuring adequate funds to complete the purchase.

The issuers receive the transaction information from the acquirer and respond by approving or declining the transaction.

For approvals, the process involves ensuring the transaction is valid, guaranteeing the card belongs to a cardholder, and that the account has enough funds or credit to complete the requested transaction.

And finally, the issuing bank or issuer sends a response code back to the acquirer through the payment network.

The issuer receives the largest part of the payment pie, receiving the lion's share of the interchange fee, which Visa and Mastercard set.

The issuer receives the largest portion because they take on the largest share of risk in the transaction flow; by guaranteeing the payment, they assume any default risk.

The issuing bank often distributes their cards to cardholders with a particular brand, Visa or Mastercard, which allows them to process over those networks. Other branded cards, such as American Express and Discover, have networks.

For example, Bank of America could issue their debit and credit cards with a Visa logo, while Capital One might issue them with a Mastercard logo.

Acquirer

The acquirer, or acquiring bank, is the bank or financial institution that enables payments for the merchants.

They provide the merchant with the software and hardware to enable payments for the customers via a POS in the store or online through the merchant's website.

The acquirer, also known as the merchant acquirer, is customer-facing, and they have a personal connection with the merchant to provide payment services. In many cases, they physically go to the merchant to sell them on processing their payments with their services.

The merchant acquirer uses their software/hardware to capture the transaction information and route it through the appropriate card network (Visa/Mastercard) to the cardholder's issuing bank for transaction approval.

After approval of the transaction by the issuing bank, the merchant acquirer settles the payment with the merchant, typically within two business days.

The amount settled with the merchant (Target) exceeds the interchange, card scheme, and acquiring fees. Any additional fees associated with refunds, reversals, and disputes will settle simultaneously.

It can get confusing here; the merchant acquirer can also be the issuing bank or issuer acquirer. That means that the same financial institution that issues your debit card also acts as the processor for Target.

In other words, they occupy two slots in the payment processing cycle and also take a larger portion of the processing fees they charge Target. So when looking at the processing cycle, JP Morgan occupies two slots, merchant acquirer and issuing bank.

Card Network

The card network is the payment rail that allows all payment activity to flow across those rails between the customer, merchant, and issuer.

The payment rail is also the card brand or scheme for every card swipe, chip-and-pin, contactless, online, or card-not-present. These card networks provide the means for all card transactions to occur, and in exchange for that access, all acquirers and issuers must pay a toll or fee.

The card networks pass along information and help settle funds between the acquirer and the issuer. They also set the standards that all acquirers and issuers communicate (or protocols) and define all rules by which acquirers and issuers handle disputes.

The two most common card networks or schemes are Visa and Mastercard, which offer an open-loop system. The open-loop system connects to the customer's credit or bank account and allows multiple payment options.

The other two common card networks are American Express and Discover, both closed-loop systems. The closed-loop system links the card to a pre-paid account, typically a credit account.

American Express and Discover act as acquirers and issuing banks and set merchant interchange fees.

Others

The final two terms you might hear thrown about in conversations about payment processing are:

• Payfacs or PSP: These providers offer merchants connections with multiple acquirers and payment methods like debit cards, credit cards, bank transfers, and others. The payfacs also integrate their technology with the merchant's POS to seamlessly collect and manage their payments.

Payfac's biggest benefit is the ease of use for the merchant; they offer simple turnkey solutions for payments for merchants without the headaches of setting up all the technology and systems.

The two biggest providers of these services are Stripe and Adyen, with Square offering the same services to small and micro-businesses.

• Payment gateways: these companies offer a technical layer that collects the clients' payment credentials on the merchant side and securely sends them to an acquirer. The leader in this space is Braintree, owned by PayPal.

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4. Players in the stack

Now that we understand the ecosystem and the flow of payments let's dive into the particular players in the stack.

Understand there are LOADS of different companies operating in the fintech space. And many of them cross over into different parts of the stack.

Source: Finix, Contrary Research

For example, JP Morgan operates as an issuing bank and merchant acquirer (Chase Paymentech).

Payment Facilitators (Payfacs)

These businesses are probably the most exciting part of the payment stack and are where a lot of energy goes to find the best investments.

Companies such as Stripe, Block (Square), PayPal, Adyen, Checkout, Payoneer, and Lightspeed are some of the many.

Adyen

Adyen is a global payment processor started in 2004 and has headquarters in Amsterdam, Netherlands, and offices in over 70 countries.

Adyen specializes in processing payments for e-commerce merchants, and it offers a variety of payment methods, including credit cards, debit cards, and alternative payment methods.

Adyen has been growing rapidly in recent years. In the five years from 2018 to 2022, the company's processed volume grew from €159 billion to €767.5 billion. Its net revenue grew from €348.9 million to €1,330.2 million, and its EBITDA grew from €181.9 million to €728.3 million.

Several factors have driven Adyen's growth, including its global reach, support for various payment methods, and fraud prevention tools. The company has also benefited from the growth of e-commerce in recent years.

Adyen is a well-established and profitable company with a strong track record of growth. The company is well-positioned to continue its growth in the years to come.

Stripe

Stripe is a global payment processor that began in 2010. The company has headquarters in San Francisco, California, and offices in over 40 countries. The company remains private, one of the few we will cover today.

Stripe specializes in processing payments for online businesses, and it offers a variety of payment methods, including credit cards, debit cards, and alternative payment methods.

Stripe has been growing rapidly in recent years. The five years from 2018 to 2022, the company's processed volume grew from $100 billion to $817 billion. Its net revenue grew from $2.5 billion to $5.5 billion, and its EBITDA grew from $1.2 billion to $2.9 billion.

Driven by several factors, Stripe's growth has relied on its easy-to-use platform, competitive pricing, and fraud prevention tools. The company has also benefited from the growth of e-commerce in recent years.

Stripe is a well-established and profitable company with a strong track record of growth. The company is well-positioned to continue its growth in the years to come.

Here are some additional details about Stripe's business and financial performance:

• Stripe's customers include many businesses, from small startups to large enterprises.

• Stripe is available in over 40 countries and supports over 135 currencies.

• Stripe has raised over $2.2 billion in funding from investors such as Peter Thiel, Sequoia Capital, and Andreessen Horowitz.

• Stripe received over $50 billion valuation based on its latest funding round.

Stripe is a leading player in the global payment processing industry. And many investors anticipate the day they go public so they can own Stripe.

PayPal

PayPal is an online payment system founded in 1998—the company headquarters in San Jose, California, with offices in over 200 countries. PayPal allows users to send and receive money online, and it offers a variety of payment solutions for businesses of all sizes.

PayPal is one of the most popular online payment systems in the world. The company has over 431 million active users and processes over $1,425 billion in payments yearly. Many businesses, from small startups to large enterprises, use PayPal.

PayPal offers a variety of payment solutions for businesses, including:

• Online payments: PayPal allows businesses to accept payments from customers online through the PayPal website or the PayPal app.

• In-store payments: PayPal offers a variety of in-store payment solutions for businesses, including the PayPal Here card reader and the PayPal Zettle card reader.

• Mobile payments: PayPal offers a payment solution called Pay in 4, allowing businesses to accept customer payments in four installments.

PayPal also offers a variety of features for businesses, including:

• Fraud protection: PayPal offers a variety of fraud protection tools to help businesses protect themselves from fraud.

• Reporting and analytics: PayPal offers businesses a variety of reporting and analytics tools to help them track their sales and payments.

• Customer support: PayPal offers businesses 24/7 customer support to help them with problems.

PayPal contains more recognizable fintech brands like the PayPal button, Braintree, and Venmo.

Here are some additional details about PayPal's business and financial performance:

• PayPal's revenue in 2022 was $27.5 billion.

• PayPal's net income in 2022 was $2.5 billion.

• PayPal's market capitalization is over $68.9 billion.

PayPal remains one of the leaders in the industry and probably one of the more frustrating ones as well. With the potential turnover in the management, many investors eagerly anticipate new leadership to take PayPal to new heights.

If you want to dig deeper into PayPal, I strongly encourage you to check out Stock Opine's fantastic article.  

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Block (Square)

Block, Inc. (formerly Square, Inc.) is a financial technology company that provides payment processing, point-of-sale (POS) software, and other financial services to businesses of all sizes. The company was founded in 2009 by Jack Dorsey and Jim McKelvey.

Block's flagship product is Square, a POS system that allows businesses to accept credit and debit cards. Square also offers a variety of other products and services, including:

• Cash App: A mobile payments app that allows users to send, receive, and invest money.

• Afterpay: A buy now, pay later service that allows customers to make purchases and pay for them over time.

• Tidal: A subscription-based music, podcast, and video streaming service.

• TIDAL HiFi: A high-fidelity music streaming service.

• Spiral: A team of engineers building open-source, decentralized financial tools.

• TBD: A team of engineers building an open developer platform to make accessing Bitcoin and other blockchain technologies easier.

Cash App users (monthly transacting actives) hit 54 million in Q2 2023 while Square’s gross payment volume (GPV) in 2022 exceeded $203 billion.

Here are some additional details about Block's business and financial performance:

• Block's revenue in 2022 was $17,531 million.

• Block's net income in 2022 was $(540.1) million.

• Block's market capitalization is over $38.26 billion.

Block has one of the best platforms with both Square and Cash App, but Bitcoin adds complexity to their focus. Additionally, they remain the only unprofitable payfac.

Processors

Processors remain the dominant players in the fintech space. These companies offer the largest payment processing across the space.

Businesses like Chase Paymentech, the leader in the space, Fiserv, Global Payments, and FIS are the leaders. But the space has a ton of disruption coming from the likes of PayPal (Braintree), Adyen, and Block, among many others.

Other banks such as Wells Fargo, Citibank, and Fifth Third Bank also offer these services.

Source: Credit Suisse

Fiserv

Fiserv is a financial technology company that provides payment processing, digital banking, and other financial services to banks, credit unions, retailers, and other organizations. The company began in 1984 and headquarters in Brookfield, Wisconsin.

Fiserv's business model provides integrated financial technology solutions that help its customers improve their efficiency, profitability, and customer service. The company's products and services include:

• Payment processing: Fiserv provides payment processing solutions for various channels, including point-of-sale (POS), e-commerce, and mobile payments.

• Digital banking: Fiserv provides digital banking solutions that help banks and credit unions offer customers various online and mobile banking services.

• Risk management: Fiserv provides solutions that help banks and credit unions protect themselves from fraud and other financial risks.

• Compliance: Fiserv provides solutions that help banks and credit unions comply with regulations.

• Analytics: Fiserv provides analytics solutions that help banks, and credit unions gain insights into their businesses and make better decisions.

Fiserv's business model is successful because it offers a wide range of integrated financial technology solutions that meet the needs of various customers.

Fiserv operates as a jack of all trades in the fintech world, and they acquired First Data in 2019, which provided them with all kinds of options.  

Clover's processing platform enables them to compete with Block and PayPal in the SMB space. Their e-commerce platform, Carat, allows them to compete with Adyen. And the core business is core banking, which provides the plumbing for banks, and is the largest provider of Zelle for banks.

Fiserv's financial performance in 2022:

• $17.3 billion in revenues with growth of 9.3% YoY

• $2.53 billion in net income

• $6.89 billion in EBITDA

Fidelity Information Services ($FIS)

Fidelity Information Services is one of the leaders in processing. The company operates the Worldpay platform, which it acquired 2019 for $43 billion.

The Worldpay acquisition allows FIS to offer the following:

• Payment processing

• Digital banking

• Risk management

• Compliance

• Analytics

Frankly, the WorldPay acquisition hasn't played out well for FIS, and the company is now looking to spin off the company.

• FIS generated $14.5 billion in revenue TTM, up 1.3%

• Net income equaled -25.3 billion in 2022 because of the write-down of goodwill from the Worldpay acquisition

• EBITDA equaled $4.1 billion

Card Networks

The card networks, Visa and Mastercard, act as toll roads or payment rails for the payment flow. They enable the pass-through from processors to banks and back to the merchant. They provide security, verification, and protocols.

Visa and Mastercard dominate the landscape as a duopoly in the fintech world. Visa processed 14.5 trillion transactions, and Mastercard handled over 6.9 trillion transactions.

Each company has one of the world's most popular logos and brands.

Visa and Mastercard also set the fee processors to charge merchants, but most revenue goes to the issuer bank. Many confuse Visa and Mastercard as cardholders; they are not. They only provide logos, not credit or debit cards. Instead, those come directly from your bank.

Both companies remain incredibly profitable, with growing revenues. For example:

Mastercard:

• $23.5 billion in revenue TTM

• Gross margins equal 100%

• Operating margins equal 57.1%

• FCF margins equal 45.9%

Visa:

• Visa generated $31.8 billion in revenue TTM

• Gross margins of 97.7%

• Operating margins of 67.1%

• FCF margins of 52.8%

Bottom line, Visa and Mastercard remain integral to the movement of money worldwide. They also offer some of the most profitable businesses out there.

The duopoly also has withstood, so far, many assaults on their moat. The biggest risks they face currently remain government regulation and crypto.

Bank Issuers

A bank issuer is a financial institution providing consumers and businesses with payment cards, such as credit and debit cards. Bank issuers also process payments made with these cards.

Chase Paymentech is a bank issuer that JPMorgan Chase owns. Chase Paymentech provides payment processing services to merchants of all sizes, including online, brick-and-mortar, and mobile merchants.

Chase Paymentech also provides various other services to merchants, such as fraud prevention and risk management services.

According to JP Morgan, Chase Paymentech processed over $1.4 trillion in payments in 2022, a 20% increase from 2021. Because they operate within one of the largest banks in the US, they have a distinct advantage in adding merchants to their ecosystem, especially if the customer already banks with JP Morgan.

Remember, banks are the ones issuing customers' debit and credit cards. But they can also act as a processor, similar to Adyen and Fiserv.

For example, most large banks, Citibank, Wells Fargo, and US Bank offer payment processing at some level, but Chase Paymentech remains the leader.

Others

The fintech space is huge, and there are so many players in the space.

Fintech has grown exponentially over the past three years, and various players have sprouted up in various niches. The fintech providers hope to fill in the gaps in how we use our money.

For example, we have companies helping us manage our bills, transfer money globally, take out mortgages, and manage crypto.

Speaking of crypto, in 2022, crypto-only accounted for 0.2% of global e-commerce transactions, so there is a long way to go there.

If I were to cover all of them, we would be looking at a 10,000-word post, so in the interest of brevity, below is a list of some of the others in the space:

• Affirm – BNPL

• Klarna – BNPL

• Apple Pay

• Google Pay

• Paytm – India

• WeChat Pay – China

• Mercado Libre – Brazil

• Dlo – Uruguay

• Revolut – England

• Wise - England

5. Future of payments

We have discovered that the fintech space is huge, with a long runway ahead. The industry continues to grow and expand, with the best still ahead.

Source: PwC

Cash is dead, well, not really, but many in the fintech space believe the way we pay is changing and will only accelerate.

The VC spending on fintech levels continues to accelerate and indicate growth in the space. This from CB Insights:

"In 2022, global fintech funding reached $75.2 billion, a 46% drop from 2021 but a 52% increase from 2020. The funding slowdown was especially severe in the year's second half, with Q4'22 funding at $10.7 billion, the lowest quarterly level since 2018."

The recent explosion of AI represents the next frontier in tech, and fintech is no exception. AI will allow current companies to build up existing tech, opening up big potential and applications.

And growth in fintechs continues to escalate.

As of 2023, there are over 26,300 fintech startups worldwide. This is up from around 12,000 in 2019. The number of fintech startups has more than doubled in the last two years.

The Americas have the most fintech startups globally, with 11,651 as of May 2023. The EMEA region (Europe, the Middle East, and Africa) has 9,681 fintech startups, and the Asia Pacific region has 5,061.

Fintech continues to seep into every aspect of our financial lives, for example:

• Payments – PayPal, Stripe, Adyen

• Personal finance – Mint, Rocket Money, Personal Capital

• Investing – Sofi, Wealthfront, Robinhood

• Insurance – Lemonade, Oscar, Root

• Banking – Chime, Varo, N26

• Lending – Upstart, Prosper, LendingClub

• Cybersecurity – Cloudflare, Crowdstrike, Avast

• AI – Nuance, Palantir, Kensho

• Blockchain – Bitcoin, Ethereum, Coinbase

Open banking and embedded payments are two of the most disruptive trends in fintech today. They are having a major impact on how financial services are delivered and are poised to revolutionize the industry in the coming years.

Open banking is a system that allows third-party developers to access customer banking data through Application Programming Interfaces (APIs). This allows developers to create new financial products and services that are more personalized and convenient for consumers.

For example, a developer could create a budgeting app that automatically imports data from a user's bank account or a lending app that can instantly assess a user's creditworthiness.

Embedded payments technology allows merchants to integrate payment processing into their websites or apps. Eliminating the need for customers to leave the merchant's website or app to complete payment.

Embedded payments are becoming increasingly popular, offering consumers a more seamless and convenient checkout experience.

Both open banking and embedded payments are having a major impact on the current state of fintech. They are enabling fintech companies to create new, innovative financial products and services that are more personalized and convenient for consumers. This leads to increased competition in the financial services industry, ultimately benefiting consumers.

Source: FIS Global Payments Report

In the future, open banking and embedded payments will help to revolutionize the financial services industry.

They can make financial services more accessible, affordable, and transparent for consumers. They can also help to improve financial inclusion by making it easier for people to get the financial services they need.

Here are some specific examples of how open banking and embedded payments are being used to innovate in the financial services industry:

• Personal finance: Fintech companies are using open banking to create new personal finance apps that help consumers track their spending, budget their money, and save for goals.

• Investing: Fintech companies are using open banking to create new investment apps that make it easier for consumers to invest their money. These apps can automatically import data from a user's bank account, so they can see how much money they have to invest and what investments are available to them.

• Insurance: Fintech companies are using open banking to create new insurance products that are more personalized and affordable for consumers. These products can use data from a user's bank account to assess their risk profile and offer a more competitive rate.

• Lending: Fintech companies are using open banking to create new lending products that are more accessible and affordable for consumers. These products can use data from a user's bank account to assess their creditworthiness and offer them a loan with a lower interest rate.

Open banking and embedded payments are just two of the many ways that fintech is changing the financial services industry.

The financials of open banking and embedded payments are still in their early stages but growing rapidly.

According to a report by Juniper Research, the global open banking market expects to reach $330 billion by 2027, up from $57 billion in 2023. The report also predicts that the global embedded payments market will reach $183 billion by 2027, up from $65 billion in 2022.

The growth of open banking and embedded payments stems from several factors, including the increasing popularity of mobile banking, the growing demand for personalized financial services, and the need for financial institutions to improve their customer experience.

Regulatory changes in many countries are also supporting open banking and embedded payments.

For example, the European Union's Payment Services Directive (PSD2) requires banks to open their APIs to third-party developers. Leading to a surge in the development of new open banking applications.

Finally, we need to address crypto.

Cryptocurrency and blockchain technology are having a major impact on the fintech industry.

They are enabling new and innovative financial products and the development of services, and they are also changing how financial institutions operate.

Here are some specific examples of how cryptocurrency and blockchain technology are impacting fintech:

• Payments: Cryptocurrencies such as Bitcoin and Ethereum can make payments without needing a third party, such as a bank, making payments more convenient and cheaper for consumers.

• Investing: Cryptocurrencies can invest in various assets, including stocks, bonds, and real estate,  providing investors with more diversification and the potential for higher returns.

• Lending: Cryptocurrencies can lend money to others without a traditional bank. Giving borrowers more credit access can also provide lenders with higher yields.

• Regtech: Fintech companies can use blockchain technology to develop regtech solutions that help financial institutions comply with regulations. This can help financial institutions reduce compliance costs and improve risk management.

• Cybersecurity: Fintech companies can use blockchain technology to develop cybersecurity solutions that protect consumers and financial institutions from cyberattacks.

Overall, the impact of cryptocurrency and blockchain technology on fintech is still in its early stages, but it is growing rapidly.

These technologies can potentially revolutionize the financial services industry and significantly benefit consumers and businesses.

But crypto faces some headwinds.

Here are some of the challenges that cryptocurrency and blockchain technology face in the fintech industry:

• Regulation: Cryptocurrency and blockchain technology are still relatively new and are not yet well-regulated in many countries. This can make it difficult for fintech companies to develop and offer products and services that use these technologies.

• Acceptance: Cryptocurrencies are not yet widely accepted as a form of payment by merchants. This can make it difficult for consumers to use cryptocurrencies to make purchases.

• Volatility: The price of cryptocurrencies is very volatile, making them risky investments and difficult for financial institutions to offer cryptocurrency products and services.

• Fraud: There is a risk of fraud associated with cryptocurrency and blockchain technology.

Despite these challenges, cryptocurrency and blockchain technology are still having a major impact on the fintech industry.

These technologies can potentially revolutionize the financial services industry and significantly benefit consumers and businesses.

6. Investor Takeaway

The fintech industry has a long runway ahead of it and many potential investments for savvy investors.

If you are looking for "safer" investments, you have more established players like JP Morgan; if you want cutting edge, you have crypto.

How we manage, spend, and move our money is undergoing a tremendous change, and we are still in the early innings of the changes.

Many changes remain coming to the industry because of the fast-improving tech, i.e., AI, plus the many regulatory changes still to come.

We will likely see a different type of money management in the next 50 years than we have seen for the last 100 years.

Most think cash is dead, which is likely true, but we have a way to go before it finally dies.

The coming fintech revolution will increase access to financial resources than we have ever seen, hopefully improving the global economy and conditions.

Areas like South America, India, and Africa still have a long way to go before reaching saturation of how we bank, which bodes well for those regions' fintech industry and people.

And we didn't even cover the digital currencies coming to governments and how they could impact our uses of money.

The bottom line, there remains a ton to like about the industry, and we remain in the early innings.

As always, thanks for reading, and I hope you found something of value here. If I can further assist, please don't hesitate to reach out.

Until next time, take care and stay safe out there,

Dave

Thank you for reading Dave's work today. We hope it provided you with valuable insights and expanded your understanding.

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