Fintech Headlines: November 7 - 13, 2022

FTX files for bankruptcy, Toast margins start to improve, Affirm reports a wider operating loss, Upstart's struggles continue

Nov 13, 2022

This Week in the Markets

The first part of this week was all about the uncertainty related to the U.S. midterm elections (and the “red wave” not materializing), as well as the unfolding collapse of the crypto exchange FTX (more on that below). The major U.S. stock indices were pretty much flat by the market close on Wednesday. However, on Thursday the U.S. Labor Department reported the October inflation data, which came in below estimates. Consumer Price Index advanced 7.7% YoY, down from 8.2% in September, and below the 7.9% estimate. The markets rallied through the rest of the week, as investors welcomed the deceleration of inflation.

Many Fintech companies reported their Q3 2022 results this week, including Shift4 Payments (NYSE: FOUR 0.00%↑), Toast (NYSE: TOST 0.00%↑), Affirm (NASDAQ: AFRM 0.00%↑), Upstart (NASDAQ: UPST 0.00%↑), and Marqeta (NASDAQ:). Most of them finished the week in the green, lifted by the overall stock market rally, but some did better than others.

↑↑ Paymentus (NYSE: PAY 0.00%↑): shares of the bill-payment technology company rose 24.58% during the week on slightly better-than-expected Q3 2022 earnings results. The company reported quarterly revenue of $128.2 million, an increase of 26% from a year ago, and an Adjusted EBITDA of $8.0, an increase from $5.5 million a year ago. Of course, the company’s shares benefited from the stock market rally that followed the inflation data release, so the share price increase might have nothing to do with the company’s earnings report.

↓↓ Inter & Co (NASDAQ: INTR 0.00%↑): shares of the Brazilian challenger bank fell 18.56% during the week. On Tuesday, the company reported its Q3 2022 earnings results. The company’s customer base grew by 2.1 million clients reaching a total of 22.8 million, and revenue grew 40% YoY reaching R$850.3 million. However, the company posted a net loss of R$29.6 million, compared to a Net income of R$34.3 million a year ago, due to the underperformance of its inflation-linked asset portfolio. In addition, the investors didn’t appreciate the intention of Brazil’s new president to increase government spending, which sent the Bovespa stock index down.

Q3 2022 earnings season starts to wrap up, with just a few earnings reports not released yet. Next week we will hear from LatAm Fintech companies Nubank (NYSE: NU 0.00%↑), dLocal (NASDAQ: DLO 0.00%↑), and Stone (NASDAQ: STNE 0.00%↑).

Some Popular Fintech pre-reading on the upcoming earnings reports:
👉🏻 Nubank Q2 2022 Earnings Review: what will drive the growth past 2022?
👉🏻 dLocal Q2 2022 Earnings Review: no signs of a slowdown and still profitable
👉🏻 Stone Profile: Warren Buffett's bet on Brazil's small businesses

FTX Files for Bankruptcy

FTX, one of the largest cryptocurrency exchanges in the world, collapsed in a single week. The company filed for bankruptcy on Friday following an absolutely surreal week of events. The story is still developing, but it looks like FTX used customer funds (without their consent) to speculate in crypto markets via its sister company Alameda Research. When customers started withdrawing funds from the exchange, it couldn’t meet its obligations. FTX and its founder, Sam Bankman-Fried, tried to raise additional funds and even sell itself to the competitor, Binance, but not none of that materialized and the company had to file for Chapter 11.

It is hard to believe that FTX was firing on all cylinders just a few weeks ago, reporting astronomical revenue growth, raising capital from top investors, and acquiring other players in the industry. And now it’s gone, together with both, investor and customer, funds. FTX collapse will certainly cause repercussions across the whole industry, but I’d expect one company to benefit from this mess….Coinbase. During the recent earnings call, the founder and CEO of Coinbase, Brian Armstrong, reiterated for, probably, a millionth time the importance of being a US-domiciled, regulated, and public company to ensure the trust of investors. FTX was none of that.

✔️ Binance’s Deal for Rival FTX Marks Power Shift Amid Crypto Turmoil
✔️ Sam Bankman-Fried Bows to Rescue From Binance’s CZ as FTX Buckles
✔️ Binance Walks Away From Deal to Rescue FTX
✔️ FTX Tapped Into Customer Accounts to Fund Risky Bets, Setting Up Its Downfall
✔️ FTX Assets Frozen by Bahamian Regulator
✔️ Bankman-Fried Resigns From FTX, Puts Empire in Bankruptcy
✔️ How FTX’s Sam Bankman-Fried Went From Crypto Golden Boy to Villain
✔️ Coinbase CEO Says Trading Activity Rising, No Plan to Buy FTX US
✔️ Robinhood Plunges as Bankman-Fried’s FTX Sells Itself to Binance
✔️ Coinbase, Robinhood Lead $10 Billion Rout in Crypto Mayhem
✔️ Robinhood Saw Its Biggest Crypto Inflows in Last Two Days: CEO
✔️ Robinhood, Coinbase Distance Themselves From FTX. They Are Not Safe Havens

Toast’s Margins Start to Improve

Toast reported its Q3 2022 results on Thursday. The company posted revenue of $752 million for the quarter, which represents a 55% increase compared to Q3 2021. The revenue growth was driven by a 42% increase in restaurant locations and a 53% increase in Gross Payment Volume. The Net loss for the quarter was $98 million, compared to a Net loss of $254 million a year ago. Adjusted EBITDA was negative $19 million, compared to negative $12 million in Q3 2021.

The company gets a lot of credit for its top-line growth. Toast serves the restaurant industry, so while the company’s performance suffered from the lockdowns during the pandemic, it is now experiencing strong tailwinds as consumers return to dining (just look at the chart below). Nevertheless, I believe the growth in the company’s revenue comes at the expense of profitability. Thus, the company has been reporting gross profit margins of under 20% during the Q3 2021 - Q2 2022 period, which makes it impossible to cover operating expenses.

This quarter though, gross profit margins started improving. Thus, the company reported a gross profit of $151 million, which translates to a 20.1% gross profit margin, an improvement from 17.1% a year ago. The gross profit margin of the company’s financial services revenue (primarily payments) increased from 19.1% in Q3 2021 to 21.3% in Q3 2022, and the company started losing less on POS hardware sales. That’s an exciting development!

✔️ Toast Announces Third Quarter 2022 Financial Results
✔️ Toast stock extends rally as company gives upbeat earnings forecast
✔️ ‘Toast Is On Fire’ as Management Lifts Outlook. The Stock Is Higher

Affirm Reports Wider Operating Loss

Affirm reported its Q3 2022 (Fiscal Year Q1 2023) results on Tuesday. Active consumers grew 69% YoY to 14.7 million, active merchants grew 140% YoY to 245K, and Gross Merchandise Volume grew 62% YoY to $4.4 billion. The company posted a Net loss of $251.3 million on total revenue of $361.6 million, compared with a Net loss of $186.4 million on total revenue of $364.1 million in the previous quarter, and a Net loss of $306.6 million on total revenue of $269.4 million a year ago.

Affirm, one of the largest Buy-Now-Pay-Later companies, is clearly a standout, as the company (at least so far) has been navigating the rising interest rate environment better than the others. The company does not seem to experience any shortages of investor funding (in fact, its funding capacity increased from $10.6 to $11.1 billion during the quarter), delinquencies remain below the pre-pandemic levels, and the management sees “no shortage of demand for our product”.

However, the company’s operating expenses, driven by the rising headcount and stock-based compensation, are increasing faster than its revenue, resulting in a widening operating loss. Affirm aims to achieve profitability on an adjusted basis (that is excluding stock-based compensation) by the end of the fiscal year (calendar Q2 2023), but I believe at some point the company’s management should show the path toward GAAP profitability.

✔️ Affirm Q1 2023 Shareholder Letter
✔️ Affirm Stock Plummets on Missed Earnings
✔️ Affirm moderating growth due to ‘macroeconomic pressure,’ CFO says
✔️ Can Affirm take down the credit card industry? It’s CEO Max Levchin’s 30-year plan

Upstart’s Struggles Continue

Online lender Upstart reported its Q3 2022 results on Tuesday. Revenue declined 31% compared to Q3 2021, and the company reported a Net loss of $56.2 million compared to a Net income of $29.1 million a year ago. The Adjusted Net Loss was $19.3 million, down from the Adjusted Net Income of $57.4 million in Q3 2021. The company’s management also guided for a further revenue decline and an increase in Net loss in Q4 2022.

Upstart, which relies on institutional investors and partner banks to fund originated loans, saw diminishing demand for loans from investors and had to scale back on origination volumes. Thus, the company originated $1.85 billion in loans in Q3 2022, down 41% from $3.13 billion in Q3 2021. The company generates revenue primarily from the fees investors pay for loan origination; hence, lower origination volumes translated into a decline in income.

Rising interest rates and increasing delinquencies do not suggest that the investor appetite for buying personal loans might increase soon, so other players in the industry, such as LendingClub and SoFi, started using their balance sheets to fund originations. Unfortunately, Upstart doesn’t hold a banking charter like LendingClub and SoFi, and the company’s CEO, Dave Girouard, continues to dismiss the idea of pursuing a banking charter, as the strategy going forward.

✔️ Upstart Announces Third Quarter 2022 Results
✔️ Upstart Plunges as Rising Interest Rates Crush Loan Demand
✔️ Upstart CEO: The pain for lenders is far from over
✔️ Upstart stock continues downturn following Q3 earnings miss
✔️ US lender Upstart cuts 140 jobs as loan demand drops

In Other News

✔️ Goldman Sachs CEO says he expects a ‘reopening’ in capital markets next year
✔️ Goldman Sachs Courted Credit-Card Technology Firms
✔️ Analysts Don’t Forsake Fintech Despite Rocky 2022
✔️ Rising Rates Help Some Banks More Than Others
✔️ Elon Musk details his vision for a Twitter payments system
✔️ Adyen announces payments partnership with Instacart
✔️ Cash App Gets the Money
✔️ Block Faces Competition With Apple. Why This Analyst Says It’s Now a Buy
✔️ Coinbase Cuts 60 Jobs in Latest ‘Crypto Winter’ Layoff
✔️ Robinhood Gave Its Customers Access to IPOs That All Flopped
✔️ It’s Still a Crypto Winter but Analysts Are Warming Up to Coinbase and Robinhood
✔️ Envestnet to Take on Schwab, Fidelity With Planned RIA Custody Service
✔️ How Upgrade became a ‘marketing engine’ for deposit-hungry banks
✔️ Latin America's largest bank partners with Galaxy to introduce crypto ETFs

Did I miss anything? Happy to hear your feedback in the comments! Thanks!

Disclosure & Disclaimer: despite rocky performance in 2021 and 2022, I own shares 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 own research.