IPAY - IPAY: A Mobile Payments ETF That Is Currently Overvalued

2024-01-19 11:39:22 ET

Summary

• IPAY is an ETF that invests in stocks focused on the mobile payments industry.
• I view this portfolio (ETF) as high quality, but too expensive (a familiar bottom-line result for me these days).
• I rate IPAY a Hold (i.e. market-like performer, not much better or worse) but continue to track it on my ETFYourself.com 100 watchlist.

Paying by cash? Not so much anymore. I was heading out to a pro hockey game the other night and stopped at the bank on the way, so I had some cash to pay the parking lot attendant. Guess what? They don't take cash anymore, only credit. And I never held my ticket to the game. It was in the online "wallet" on my phone.

Wow, did that hit me. This is not the transactional world many of us grew up in. And at that moment, I decided to be the first analyst on this platform since 2022 to review the ETFMG Prime Mobile Payments ETF ( IPAY ).

IPAY invests in stocks focused in the mobile payments industry, and the reason to own it is to try to benefit from the shift in cash to mobile payments. It aims to track the Prime Mobile Payments Index, and it is a "full replication ETF." That means it holds all of the underlying stocks in its index, instead of buying just enough so that its managers feel they can track the index very closely. IPAY has $346 million in assets under management, and $2 million in average daily trading volume, so liquidity should not be an issue for many investors.

I track this ETF on ETFYourself.com as part of our watchlist of 100 ETFs as a way to gain focused exposure to the mobile payments market. I seek targeted funds that can add value to my overall portfolio by being effective tactical pieces of a larger investment pie.

And, while IPAY covers an interesting industry, I don't own it now. The technical picture looks as weak as the rest of the equity market, and the stocks that have the greatest influence on this ETF are fundamentally overvalued. I rate IPAY a Hold, simply because I think it could be a market-like performer, and my equity ETF ratings are based on a "versus S&P 500" assessment.

IPAY: focused, but on currently expensive stocks

IPAY's holdings are focused primarily in the technology sector (62%), with financials following (32%). IPAY holds 60 stocks, but is fairly concentrated in its top 10 holdings, with about 47% of the total portfolio in these stocks.

I like to see this concentration when seeking this more specific industry exposure, like the mobile payments market. Because again, IPAY is a potential role player, a supporting piece in a portfolio, not a "core" portfolio holding. It is too narrowly-focused for that. The top names are household names in the payments industry, including American Express, Mastercard, Visa, and PayPal.

The push toward mobile payments can be seen every day, whether we're grabbing lunch or groceries or entering a pro sports event on a dark, dreary, rainy night in Florida (yes, the walk into the arena was swift but wet). But a deeper look at the performance and metrics of IPAY is needed to see if this is the correct time to buy in. My conclusion was that it is not.

IPAY trades at a trailing P/E ratio of about 18x. That is not terribly high in today's market, but a lot of market segments that trade at that valuation level just came off of strong performance years in 2023. IPAY was a laggard last year.

Moreover, as shown here, it has been a slow road to nowhere since spring of 2019, even before the entire pandemic period and post-period! I look at this two ways, in this sequence: at some point ETFs like IPAY will be strong buy candidates, given the years of net-zero performance and the quality of the stocks it owns.

However, first I suspect we'll need a market-wide "washout" to bring valuations down. This is part of the IPAY story to me, but it is similar for dozens of sectors and industries, across the US equity market.

Since more than 28% of the portfolio is allocated to the top 5 holdings, it is worth a look at the factors and performance for these. The top 5 consists of well known large cap stocks.

Should I Pay for this now? Not yet

Those factor grades translate to the following for me: overvalued, growth businesses, that are highly profitable. In other words, good companies, but not attractively-priced stocks at the current time. Investors will understandably get tired of my beating that same drum, as I have been here in early 2024. But I don't make the rules, I just run a disciplined process, and try to be a tough grader!

Overall, IPAY is holding an interesting and reliable basket of mobile payment stocks, but it doesn't seem like the timing may be right with its current price and its underlying factors. Valuations of the top holdings within IPAY look high now, which could weigh down performance.

I rate IPAY as a HOLD, just like the Seeking Alpha ratings are currently for those top 5 holdings analyzed above. It is an interesting ETF to follow (part of 100 I focus my ETF research on). I've owned it before, and I expect I'll own it again. And maybe even around this price, but not at this price-earnings level. That's going to take some time, or a market crash, and I can't predict the latter. So it stays on the "rack" for now.

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