Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

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Is Capital One Making Money?

Capital One Financial Corp (NYSE: COF); America’s fifth largest credit card issuer is in the news for all the wrong reasons.

In July, Capital One admitted that alleged hacker Paige Thompson allegedly stole data about 100 million Americans and six million Canadians, The Verge reports. The breach could cost Capital One between $100 million and $150 million in 2019.

A federal complaint alleges Thompson stole data from Capital One’s Amazon Web Services (AWS) server and placed it on a public GitHub page. However, it is not clear how much Capital One data Thompson exposed through GitHub. In addition, Thompson placed some Capital One customer data on Slack, a cloud collaboration platform.

The Verge speculates Thompson’s actions were not malicious. On the other hand, criminals could have used the data she exposed for identity theft.

How much could the Breach cost Capital One?

Capital One faces major problems no matter what Thompson’s motives were. It could take years to take track down all the victims and figure out what she stole. In addition, it is impossible to tell if any Capital One data is in criminals’ hands.

Tellingly it took years for authorities to track down all the data, criminals, and victims from a 2013 data breach at Target (NYSE: TGT). Significantly, hackers gained access to Target’s systems from a detailed case study of Target’s IT posted on Microsoft’s website, claims.

In 2017, Target ultimately paid an $18.5 million settlement to customers in 47 states and the District of Columbia to settle claims arising from the breach, USA Today reports. New York State Attorney General Letitia James says her office will investigate the Capital One breach, USA Today reports.

Will the Breach Hurt Capital One?

Capital One is the fifth largest credit card company in the United States. USA Today estimates Capital One has $336.91 billion; or a little over 10%, of the $3 trillion American credit card market.

Capital One made money in the form of $5.782 billion in gross profit and revenues last quarter, Stockrow calculates. However, Capital One’s revenue growth shrank by 2.96% in the quarter ending on 30 June 2019. That was the first quarter Capital One revenue growth shrank in the last seven quarters.

Conversely, Capital One’s revenues and gross profit grew from $5.390 billion on 31 March 2019 to $5.782 billion on 30 June 2019. Capital One reported a net income of $1.625 billion and an operating income of $2.003 billion on 30 June 2019.

Capital One is Generating Cash from Its Cards

Capital One generated $4.236 billion in operating cash flow and $4.013 billion in free cash flow from its products in the quarter ending on 30 June 2019. In contrast, Capital One reported a negative investing cash flow of -$5.138 billion and a financing cash flow of -$2.705 billion in the same quarter.

Importantly, Capital One is a cash rich company. It reported $15.111 billion in cash and equivalents on 30 June 2019. Therefore, Capital One can easily cover any losses from the breach.

Moreover, Capital One has the resources to pay a settlement or lawsuit arising from the breach. For example, Capital One reported total assets of $372.616 billion on 30 June 2019.

Is Capital One a Value Investment?

Many people will wonder if Capital One is a value investment because of its share price, $93.9 on 13 September 2019. In comparison, Mr. Market priced Visa Inc. (NYSE: V) at $177.16 on the same day.

Notably, Capital One paid a dividend of 40₵ on 2 August 2019. In addition, credits Capital One with a dividend a dividend yield of 1.7%, an annualized payout of $1.60, and a payout ratio of 14.5% on 13 September 2019.

Thus, Capital One looks like a decent dividend stock Mr. Market underprices when I compare it to other financial stocks. In particular, Capital One is cheaper than other big financial outfits that are trying to enter the credit card market

For example, investment banking legend Goldman Sachs (NYSE: GS); which is issuing its first credit card with help from Apple Pay, traded at $219.95 on 13 September 2019. Strangely, Capital One already does of the things Goldman Sachs is trying to do.

Can Capital One Compete with Goldman Sachs?

For example, Capital One operates an online consumer bank. Meanwhile, Goldman Sachs is trying to build such a bank with its Marcus artificial intelligence solution.

On the positive side, Capital One is already in the consumer banking business. On the negative side, Capital One finds itself in direct competition with Goldman Sachs, which is not a good place to be.

Goldman Sachs is a ruthless competitor with tremendous resources. For example, Goldman Sachs reported $91.092 billion in cash and short-term investments and nearly $1 trillion in total assets on 30 June 2019.

Moreover, Goldman Sachs is spending part of that money to research and develop financial technologies like artificial intelligence, cryptocurrency, and stablecoins. If Goldman Sachs’ bet on technology pays off, the investment bank could steal many of Capital One’s customers.

For example, Goldman Sachs is sneaking onto average Americans’ smartphones via its Apple Pay Visa virtual credit card. Such app-based financial solutions are a direct threat to Capital One’s credit card business.

The next logical step is for Goldman Sachs to offer checking, savings, and investment accounts through Apple Pay. Tellingly, Marcus is offering savings accounts. I suspect stablecoins are the next product Marcus could offer.

In particular, Goldman Sachs could take many of the high-income customers, leaving Capital One with only the middle or working class client. Thus, Goldman Sachs could end up with the customers with the money, increasing Capital One’s risk by forcing that bank to rely on low-income clients.

Capital One is a Value Investment in Finance

Therefore, Capital One is already in the business Goldman Sachs wants to enter.

Thus, I consider Capital One a good alternative to higher-priced financial services stocks like Goldman Sachs and Visa. If you are looking for a lower cost value play in finance investigate Capital One Financial Corp (NYSE: COF). I think Capital One is still a value investment despite the data breach.