Should Square Buy a Music Streaming Service? – The Motley Fool
In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Jason Moser about the latest headlines from Wall Street. They talk about Square‘s (NYSE:SQ) new acquisition target and what past deals can tell us about its future. Jason also provides a quick overview of the financial sector for the coming year, and much more.
Chris Hill: It’s Monday, Dec. 28. Welcome to MarketFoolery. I’m Chris Hill. With me today, Jason Moser. Hello, sir!
Jason Moser: [laughs] Well, hello to you. How are you?
Hill: I’m good. I know it’s just been, you know, a week or so, but it seems longer because of the Christmas holiday, so.
Moser: [laughs] Yeah, it really does. Everything just slows down to, like, a glacial pace this time of year. And sometimes I wake up in the morning, and I’m like, man! Do I even have a job? And I’m trying to remember exactly what I do, and then I got to catch up on these companies, and it’s like, well, you know everybody is kind of just taking it easy at the end of the year, nobody is clamoring for investment advice at this point, I guess. So, we have a week or two until we get to kick it back into a high gear, I suppose.
Hill: Well, one of the things that has not slowed down is the pace of business news. So, we’ve got a ton of news to get into. So, we’re going to talk about financials. And I’m going to go broad in a minute, but first I wanted to get your thoughts on the story involving Square, which are reports that Jack Dorsey is interested in buying TIDAL, which is a music streaming service I’ve never heard of before today. [laughs] Look, Jack Dorsey has said in the past that he’s interested in building on the Square platform to offer other services. Music streaming doesn’t strike me as an obvious natural fit, but what was your reaction when you saw this story?
Moser: My initial reaction was probably right on par with yours there, and it doesn’t seem like the first place I would go if I were looking to build out this Square commerce ecosystem. I mean, I appreciate what he’s saying and what he’s thinking about wanting to do longer term with the business and with the platform, with what Square offers. And I think a lot of this kind of centers around the Cash App, maybe. But, yeah, TIDAL, I’ve heard of it before; never subscribed to it. It just is a music streaming service. And it was built on the idea that high-fidelity sound and artists owning the music would perhaps be a differentiator. And maybe a time ago that was, at least the high fidelity, but it’s not anymore. I mean, you’re seeing companies from Amazon and Spotify to Apple all investing in that same level of delivery there.
So, you know, I don’t know if there’s anything with TIDAL that makes me think, oh, wow! That’s some big differentiator that makes me want to consider dropping my Spotify subscription, because they don’t have even anywhere close to the catalog that Spotify has, or Apple for that matter. And when you look at the actual business, I mean, they don’t have anywhere near the subscribers. I think the number around 2016, TIDAL reported somewhere in the neighborhood of 3 million subscribers, which is just a fraction of what you’d find on Spotify and Apple. And really, that is one of the biggest advantages with that line of work, in music streaming, is the size of your customer base.
But I mean, the economics of music streaming are still very difficult. So, to me, this reminded me a lot of, I mean a little while back, if you recall, Twitter — and this matters, because Jack Dorsey is also the CEO of Twitter — and I understand they’re two very different businesses, but regardless it’s the same leader. Twitter invested in SoundCloud, and they were actually kicking around acquiring SoundCloud at one point, and they decided not to do that. Instead through their Twitter ventures they made, I think it was a $70 million investment in SoundCloud, which just quickly evaporated to $0. They pretty much, they just wrote the whole thing off, because I mean, there’s really nothing you could really do with that.
And in regard to Square, I mean, you remember they had the Caviar side of the business a little while back, in food delivery. They decided to go ahead and sell that to DoorDash in order to focus more on investing in its core payments business. And at the time that made a lot of sense, and that actually is a pretty good investment for Square given that they bought Caviar for just under $50 million and sold it to DoorDash for I think just a little over $400 million, so this worked out. And I agree, selling Caviar just made sense. It wasn’t something that really lined up with the rest of Square’s business at the time, and there were clearly companies out there that were doing it better. This kind of seems the same thing to me. It just doesn’t really line up with Square’s business. There are companies out there that are doing it way better. Diversification is a thing. You have to be really careful. [laughs]
Hill: It’s going to be interesting to see if they proceed with this, because there’s a price at which it’s worth the risk. I mean, Square is a $100 billion company. They have access to all kinds of capital. I don’t have a particular price in mind, but there is — probably less than $500 million [laughs] would probably be a good place to start. I mean, there’s a price at which Dorsey overpays and it spooks investors, and there’s a price at which it’s like, you know what, this is a reasonable amount of money, and if it pays off, great, and if not, well, we write it down.
Moser: Yeah. The biggest risk here, it’s not a financial one, I don’t think. I mean, to me, I would imagine this has to be far, far under $500 million. I think, if I recall correctly, Jay-Z bought TIDAL at some point for $56 million.
Hill: Five years ago, yeah.
Moser: Yeah. So, it would be very hard pressed to argue that they’ve been witnessing some just exponential growth that would just pump that valuation up to just new heights, given even with [laughs] everything we’ve seen in the market, where it seems like the more money a company loses, the higher the market wants to bid up its stock price. I don’t know that would necessarily be the same case with TIDAL there.
So, I’d imagine the biggest risk is not a financial one, but Square has got the balance sheet to pretty much do whatever they want. They can certainly afford it. To me, it’s really more about taking your eye off the ball and making bad investments.
It seems to me, the argument I see folks using to justify this, if it actually does happen, is that this could be an acquisition tool and a brand-building vehicle for the Cash App. And I mean, they’re doing all sorts of things with the Cash App now. They are more finance related, whether it’s transferring money or trading stocks or buying bitcoin; music streaming doesn’t really line up with those. I mean, I guess owning it could expand your market and give you a brand-building tool, but do you really need to acquire it to do that? I don’t think so. It doesn’t seem like it probably is the wisest use of capital and time. But with that said, yeah, I mean, it’s something that, if they decided to go through with this and it didn’t work out, I mean, sure, we would forget about it pretty much as quickly as we forgot about SoundCloud and Twitter. That was just kind of one of those things that ultimately didn’t really affect the business. It didn’t matter. But you know, we’ll have to wait and see.
There are examples of this type of business out there before not really getting off the ground. I don’t know if you remember, a little while back, Neil Young had that Pono concept, which was like a music streamer/music streaming service. And it was all based on high-fidelity music as well. But like that actually, there was a device involved as well. Which, it’s kind of like Microsoft Zune; [laughs] I mean, good luck with that, right? And clearly, that didn’t work out. So, there is a precedent out there that says this is a difficult step to take.
Is it a reasonable bet? I mean, yeah, I think you’re right, the price really is probably what dictates whether it’s a risk worth taking or not. But I think really for me, it’s more about just, is this really the wisest use of capital and time? And I’m not so certain that it is, but again, that’s no certainty that this deal will even happen in the first place.
Hill: I have no memory of that Neil Young device.
Moser: Well, you’re not the only one. [laughs]
Hill: [laughs] So, later in the week we’re going to record our 2021 preview for Motley Fool Money. I don’t know if we’re going to get into this topic on the show, but since you host the Financials episode of Industry Focus, let’s get your thoughts on the financial industry. I mean, looking back on 2020, financials, it was kind of a mixed bag in terms of how the stocks did across the industry.
So, first and foremost, how optimistic are you about the financial industry in 2021?
Moser: Yeah, it’s interesting to see how this industry is evolving. On the whole, I’m optimistic. I’m glass half full that the financials industry, writ large, is in a good position to recover. But it’s not to say that the entire financial industry really had a tough 2020, right? It sort of breaks down into what type of financials you’re talking about. And so, if you look at something like the S&P 500 financials index, and that comprises mostly banks and insurance companies. I mean, that index is still down about 6% for the year, and that’s trailing most other sectors. But interestingly, that doesn’t include companies like Square, and PayPal, and Mastercard, Visa, those payment companies that we know, and not to mention all of these other fintech companies that have come online here recently. And so, to me, I see a year coming up where I think both fintech and I think financials are going to do OK. I think the banking sector, to me, is going to be one that’s really interesting. And we have talked about this before in regard to [JPMorgan Chase] and some of the things that Jamie Dimon had been saying recently in regard to how their business is shaking out, and how he sees 2021 shaking out.
It’s going to be possibly, sort of, a tough first half of the year with some tailwinds picking up for the second half of the year. And I think a lot of this really just hinges on vaccines and interest rates, to be honest with you. We have the news, obviously, that vaccines are out there now and being administered, and hopefully that continues to accelerate and people continue to do that, and we can kind of get past this stuff sooner rather than later. If that’s the case, I mean, we’ve seen now where banks are going to be able to start buying back shares again. And JPMorgan, among others, is making a big commitment to go in there and buyback a ton of stock. And in tandem with that, you’re going to see a lot of reserves start being released as well.
So, if we can see vaccinations, economic activity picking back up, the potential for interest rates to start pushing back up a little bit. All of this leads to perhaps a little bit more on the borrowing side as well. Consumers are able to borrow a little bit, and that obviously is a bank’s bread and butter for the most part. I mean, you could see an environment where banks proper would be set up for a pretty good 2021. And I think that you couple that with fintech — to me, fintech is going to be a part of the economy that’s just going to continue to do well. I mean, I don’t think every company out there is going to do well, but I think that a lot of them are going to do well.
And one of the things I looked at here for 2020, because we talk about the War on Cash basket on the show a lot, and it’s been a little while since we introduced that, but in looking at how that War on Cash basket performed in 2020. Remember, that’s Mastercard, Visa, PayPal, and Square. Very interesting to see the discrepancy, the disparity there between the two, with Mastercard and Visa actually — I mean, they were up for the year; they underperformed the market, though, just by a touch, whereas PayPal and Square, PayPal was up 122% to date, Square up 267% to date, outperforming the market handily. And so, you’ve seen on the fintech side, the payment side, there’s been a little bit more growth there versus the performance of the banks on the insurance side. But I do think that if we see the economy turning back around, those could be some nice tailwinds for both parts of the financial industry, and I would be very encouraged.
Hill: It’s interesting though, because if you think about the economy opening up, particularly small businesses, so many of which have been hit really hard this past year, they’re going to be, in a lot of cases, looking for loans to get going again. You mentioned the interest rates. That’s kind of a double-edged sword for the banks, right? Because on the one hand, if interest rates are low, then presumably they’re going to get more small business coming in the door and looking for loans. Although if you hook Jamie Dimon up to a lie-detector test and say, well, what do you want more, interest rates to go up [laughs] or them to stay? Like, I don’t know which one he chooses, because if part of the bull case for investing in the big banks is, interest rates can go up, it’s like, I don’t know that that’s going to happen, you know, certainly in the first half of 2021.
Moser: No, I agree with you, I don’t think they will either. I think that it’s really about a progression here. And I think that as we see this — so, I think we saw this COVID relief bill that just was signed, and hopefully, that is going to make more Paycheck Protection Program funds available for these small businesses to borrow. And ultimately for the banks, those loans aren’t really profit drivers at all. I mean, that’s just a way, really, for them to serve as a way to help get the ball rolling again and help get these businesses back up and running and give them access to capital. What I think ultimately is, what we’re looking for, is to see these businesses have that access to capital, get back up and running. And as these businesses get back up and running, then the after effects of that in consumers coming back to shop, employees keeping their jobs and making a paycheck, and being able to pump that money through the economy. I think that is probably where you would see that second half of the year, that impact becomes a little bit more apparent. Particularly, then consumers can get back to borrowing a little bit. And at that point you see that demand starts pushing back up, perhaps you can see interest rates start pushing back up in a healthier economy. That would be, I think, a little bit further down the line. So, it is kind of a starting point for a lot of these banks.
But I think, again, you also have to couple it with the fact that you’re going to see a significant amount of share repurchases here in the coming year, unless something drastic changes, and along with that you’re going to see reserves released, which, those two in tandem, I think are really going to help these banks’ bottom line. And that could serve as a catalyst. And if we see signs of a sustainable recovery, well, then that just bodes well for the banks even further down the line.
Hill: Jason Moser, always good talking to you; thanks for being here.
Moser: Thank you.
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear.
That’s going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.
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