Fintech Headlines: August 29 - September 4, 2022

Klarna reports ugly losses, VISA reports payment volume growth in August, and PayPal's stock gets an upgrade

This Week’s Gainers and Losers

This was a brutal week for the markets following Jerome Powell’s speech at Jackson Hole last Friday (August 26, 2022). Contrary to the investor expectations of a policy “pivot”, the Fed’s chairman pledged to continue raising rates in the fight against inflation and expects the rates to remain high for longer. High interest rates are not good for the present value of future cash flows.

Payoneer continued advancing following strong Q2 2022 results, as well as Walmart’s push into Canada (Payoneer provides working capital for merchants selling on Walmart’s marketplace). Paysafe shares declined following further changes in the top management (replacement of the company’s CFO) and the stock downgrade. Interestingly, both companies went public through SPAC mergers in 2021.

Legend: 5-Day Change, August 29 - September 2, 2022

Klarna reports ugly losses in H1 2022

Klarna, the world’s largest Buy-Now-Pay Later company, keeps getting media attention. The company is not public, yet still has to provide financial disclosures due to the regulatory requirements in Sweden (Klarna holds a banking license). Thus, Klarna reported a pre-tax loss of SEK 6.2 billion ($570 million) for the first half of 2022, up from SEK 1.8 billion ($170 million) a year ago. The company’s revenue grew 24% YoY to SEK 9.1 billion ($840 million).

Earlier in the year, the company had to lay off 10% of its staff, and raised additional capital at the valuation of $6.7 billion, which was a painful markdown from the valuation of $45.6 billion a year ago. “When we set our business plans for 2022 in the autumn of last year, it was a very different world,” Klarna’s CEO, Sebastian Siemiatkowski, told investors. Hopefully, the company will be able to adjust to the new reality, and we are done with the stream of bad news.

P.S. Affirm, Klarna’s closest competitor, is also spending like there is no tomorrow, with the operating losses increasing on both the absolute and relative (to revenue) bases (read the company’s Q2 2022 earnings review).

Source: Wall Street Journal

✔️ Fintech firm Klarna’s losses triple after aggressive U.S. expansion and mass layoffs
✔️ Klarna losses more than triple as consumer spending slows
✔️ Klarna CEO says job cuts done, focus on profitability
✔️ Behind Buy-Now-Pay-Later Losses: Slowing Revenue, Growing Expenses

Visa reports payments volume growth

As part of its disclosures, VISA reports monthly payment volumes across its network. This data provides great insights into the state of the global economy and consumer spending. Thus, this time VISA reported an 11% YoY growth in its U.S. payment volume and a 12% YoY growth in the number of transactions it processed globally. In July, VISA reported similar numbers, with U.S. payment volume growing 11% YoY, and global processed transactions growing 13%.

Q2 2022 earning calls were dominated by the CEOs talking about deteriorating economic conditions, and the steps that their companies were making to prepare for a potential recession. However, as VISA’s data suggests, U.S. consumers kept spending through the summer months. Of course, the spending volume was partially fueled by the record inflation and seasonality (summer season), so we have to look at these numbers with caution. Looking forward to the September report!

✔️ What Consumer Spending Slowdown? Visa’s August Results Show Little Impact.
✔️ Visa Sees Growth in August US Payments, Travel Rebound Aids
✔️ Analysts Bullish on Visa Following Payment Volume and Transaction Data

PayPal stock gets an upgrade

PayPal is going through rough times following the post-pandemic deceleration of e-commerce. First, the company gave up on its plans to reach 750 million active users (Q4 2021 earnings call). Then, the company slashed its growth target for the year and rescinded its mid-term growth guidance altogether (Q1 2022 earnings call). At the same time, PayPal continued to increase its operating expenses and give out hefty stock-based compensation packages to its team.

I believe this is about to change, with Elliott Investment Management, an activist investor, taking a $2 billion stake in the company. During the latest earnings call, Dan Schulman, the company’s CEO, spoke about the need to focus, planned cost cuts, and return of the capital to shareholders through share buybacks. The efforts (or at least the intentions) were noticed by the Bank of America analysts, who upgraded the stock from “Neutral” to “Buy” and raised the target price to $114 a share, up from $94 a share.

✔️ The bulk of PayPal’s free cash flow will go to returning cash to shareholders
✔️ PayPal gets an upgrade from Bank of America
✔️ PayPal Shares Pop as Analysts Rally Around the Stock
✔️ PayPal will see tailwinds in 2023, says Aureus Asset Management’s Karen Firestone

In other news

✔️ Ethereum’s Big Moment Is Coming With ‘The Merge.’ What It Means for Crypto.
✔️ Coinbase Needs Some Good News. Ethereum Could Give Some.
✔️ Student Loans Could School Credit Investors
✔️ Lucid, SoFi, and 3 Other SPAC Stocks Whose Downturns Might Be Ending
✔️ Inspired By Brazil’s Pix, Federal Reserve Reportedly Plans Similar Payments Model
✔️ Robinhood’s Traders Are Leaving and Its Stock Has Sunk: What Went Wrong
✔️ UBS scraps $1.4 billion deal to buy Wealthfront
✔️ Brazil Moving Toward ‘Tokenization’ of the Economy, Central Bank Chief Says

Disclosure & Disclaimer: despite rocky performance in 2021 and the first half of 2022, I have open positions in most of the companies that I write about in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.