Is Globe’s strong showing justifiable?

Globe was one of the best performers in the stock market in August. From P1,860 as of end July, the stock jumped 53 percent to close at P2,848 on Friday. This raised the telco’s market value to P380 billion, which is an all-time high for the company.

The main catalyst for Globe’s stellar performance was GCash’s turnaround. In its latest analyst briefing, Globe announced that Mynt, which owns 40 percent of GCash, already booked a profit in June. It also shared operating highlights such as the rapid growth in number of users from 33 million as of end 2020 to 44 million as of end June, and the projected increase in value of transactions to P3 trillion this year from more than P1 trillion last year. These numbers show how the fintech is gaining momentum and why the company will remain profitable over the long term. Consequently, investors aggressively bought shares of Globe despite the ho-hum performance of its mobile and home broadband businesses.

Reasons to be excited about GCash, Globe

First is the Philippines’ large unbanked population. As of 2019, only 11.5 percent of adults in the country owned traditional bank accounts, according to the Bangko Sentral ng Pilipinas’ financial inclusion survey. Challenges remain in growing the said number, including the Filipinos ‘inadequate funds and lack of documentary requirements to open an account.

However, most Filipino adults own a cellphone. Mobile wallets also don’t have any required minimum balance. These factors make it easier for people to own mobile wallets such as GCash than bank accounts. It is not surprising then that more Filipinos already own mobile wallets than bank accounts today.

The pandemic is also accelerating the adoption of e-wallets in the country given mobility restrictions in place and the ease of sending and receiving payments without physical contact using digital means. As discussed earlier, GCash currently has 44 million users. It is also accepted by more than 2.5 million merchants and social sellers. In contrast, GCash only had 20 million users and was accepted by only 75,000 merchants in 2019 prior to the pandemic.

Finally, GCash has the potential to be as valuable as the country’s top banks, benefiting Globe shareholders.

Note that Ant Financial, which owns Alipay, is one of the major shareholders of GCash through Mynt. Alipay is the largest third-party provider of online payments in China, with more than 1.3 billion active annual users and a market share of almost 56 percent as of June 2020. More importantly, Ant Financial has successfully monetized its popularity through various financial services such as payments, microloans, wealth management and insurance. Note that in 2019, Ant generated $17 billion in revenue, which is close to PayPal’s $17.8 billion despite being in existence for a shorter period. Given Ant’s interest in Mynt, it could help GCash do the same. In fact, GCash is already providing numerous financial services in its platform currently.

Main risk facing GCash is gov’t regulation

Recall that in November 2020, Ant Financial was supposed to list with a valuation of about $300 billion. However, a few days before its IPO, the Chinese government suddenly introduced new regulations on online lending which would negatively affect 40 percent of its revenue. This led Ant Financial to suspend its IPO.

Although Ant Financial could eventually push through with its listing, its valuation would most likely be much less than $300 billion given much stricter government regulations controlling its growth.

Although the Philippines’ central bank is very supportive of fintech companies, there is still a risk that it will tighten regulations in the future as mobile wallets such as GCash gain more popularity.

Admittedly, at its price of P2,848 and market capitalization of P380 billion, Globe seems expensive using traditional valuation measures. However, before today, Globe hit a peak price of P2,700 in 2015, implying a market capitalization of P360 billion. Since then, profits from its traditional businesses have grown from P17 billion to P21 billion in 2020. Moreover, GCash was still losing money in 2015 but is now profitable and will most likely become even more profitable given the growing number of users and value of transactions. That said, while it is hard to put a value on GCash, Globe’s current valuation seems justifiable, especially given how expensive other successful fintech companies are globally.