Top Headlines in Fintech #012

“I think about what a company is going to be worth 10-20 years from now. And I hope it goes down when I buy it.” Warren Buffett

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Earnings season is in full swing, with results piling in from corporate America, including Warren Buffett’s Berkshire Hathaway. Berkshire Hathaway saw its quarterly operating profits jump close to 7% as the holding company’s cash hoard neared $150 billion, buoyed by the insurance business. 

Buffett is known for being tech averse but has grown to embrace stocks such as Apple and HP, among others. The billionaire investor has been transparent about his investment style, sharing that evaluates a company based on what it will be worth in the next decade or two, a strategy that has served him well. 

The lion’s share of investors, he suggests, is overly driven by emotion. He also noted that you don’t need to be a brain surgeon to pick winners - you just have to have what he refers to as the “right orientation.” 

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Image by Twitter 

Meanwhile, the clouds are beginning to clear in the economy as the latest inflation and jobs data suggests. Economists have yet to give the all clear, but optimism is starting to build despite the volatile stock market performance of late. 

Fintech & Big Tech Earnings

SoFi kicked off the fintech earnings parade in style. The fintech’s quarterly results were better than expected and the company increased its EBITDA outlook for the full year. Among the bright spots was its personal lending business, with the company revealing $340 million in whole-loan sales. In response, analysts at Mizuho, who have a buy rating attached to the stock, lifted the price target from $9 to $15 and raised earnings estimates. The catalyst for the bullish call is SoFi’s positioning in the student loan market.  

In addition, Block, formerly known as Square, also reported its quarterly results. Jack Dorsey’s company similarly beat Wall Street estimates and raised its outlook for the year. Second-quarter revenue came in at $5.53 billion vs. $4.4 billion in the year-ago period. The company’s popular payments product Cash App saw a 37% jump in gross profits to $968 million. The company is looking to expand overseas and slash costs, resulting in a slowdown in hiring. 

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Block/Square’s results: 

Image by Twitter/X Corp

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Takeaway: While the high interest rate environment has produced higher interest income for fintechs, the sector has not been immune to the economic headwinds. Layoffs in the broader technology sector have surpassed 223,000 vs. 80,000 at the height of the health crisis. In addition to Block/Square, online broker Robinhood also recently announced job cuts, including approximately 7% of its workforce. Cost cutting and more selective hiring for vital positions appear to be the name of the game at this critical juncture in the economy, though the worst does appear to be over. 

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PayPal also reported better-than-expected Q2 results. However, investors were spooked by other performance metrics, chief among which is margins. While PayPal is a growing company, much of the growth is unfolding in lower-margin areas vs. more attractive areas such as cross-border payments and e-commerce transactions amid heightened competition from the likes of Apple Pay, as pointed out by The Wall Street Journal.

Meanwhile, PayPal revealed that it is close to naming a new CEO to replace the outgoing Dan Schulman. The company stated on its earnings call that it is in “the very final stages of the process with several outstanding candidates, all of whom are highly qualified and excited to lead PayPal as we go into our next chapter of growth.” 

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Dan Schulman/Image by Payments Dive/Getty Images

Influential Hire 

While PayPal continues to hunt for its new CEO, another fintech company has just hired a seasoned industry executive for its C-Suite. Orlando-based Stax Payments has named  Paulette Rowe as its new CEO, replacing interim chief executive John Kristel. Rowe, who previously led Paysafe’s integrated and e-commerce solutions business, has been recognized among the “Most Influential Women in Payments.” 

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Image by BusinessWire 

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M&A 

The fintech M&A pipeline is picking up. Fintech-as-a-service company Rapyd is scooping up a big part of PayU in a $610 million acquisition. PayU is owned by Prosus NV, whose payments and fintech division has sales of over $900 million. Prosus is holding onto some of PayU, including its India, Turkey and Indonesian divisions. According to TechCrunch, Rapyd is in the final stretch of raising $700 million in a financing round, the proceeds of which will be directed toward the acquisition. 

Takeaway: The M&A market has remained weak in 2023 as a result of the economic uncertainty surrounding interest rates, rising costs of capital and a banking crisis. In Q1, the number of deals with a price tag of over $25 million sank 46% vs. the year-ago period, according to McKinsey & Company. However, deals in the tech, media and telecom sector led the way. And there are signs of the clouds clearing, with a recent survey suggesting that M&A activity is poised to increase as market players eye “transformative deals” in 2023.

Stock Spotlight

Block: Shares of Block (aka Square) plummeted over 13% on Aug. 4 in response to the company’s latest quarterly earnings report. The stock hasn’t experienced such a steep decline since March. While the company is growing, it is not growing fast enough, with Jefferies analyst saying that results “lacked oomph.” Analysts at Truist lowered their price target on SQ shares to $85 from $90. 

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Block Chart | Image by TradingView 

SoFi: Shares of SoFi have taken investors on a roller coaster ride in recession trading sessions. The stock soared 20% on the heels of the company’s earnings results on the expected benefits from the resumption of student loan payments. However, the party didn’t last, and shares fell back down to earth by the end of the week on what appears to be some profit taking.

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SoFi Chart | Image by TradingView 

Weekend Reads

• “Why a Smaller IT Headcount is Not Necessarily Better: Metric of the Month” - CFO.com explores the decisions that organizations face when they are taking cost-cutting measures and why they might want to reconsider layoffs in IT. 

• “Adobe on Why the Tech Industry Is Ripe for Consumerizing Business Payments” - PYMNTS.com published a report on the challenges that exist for tech innovation in the B2B payments space and the role that automation can play in the transformation. 
• “Managing Identity Risk Is Critical To European Fintech's Future” - Forbes published an article on the challenges for European fintech companies, particularly as it relates to card fraud. 
• “PE Investment in European Fintech, Payments Sectors Dwarfed by US Deals” - S&P Global published a report on private equity and venture capital investments in the fintech sector, saying that U.S. deal activity has far outpaced that of Europe.
  Conclusion 

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The latest inflation data is due out this week, which will offer a glimpse into the strength of the economic recovery and what the Federal Reserve is likely to do on interest rates. Fintech earnings have failed to impress Wall Street in the latest quarterly results, but with the prospects of artificial intelligence (AI) further disrupting the landscape, the tide could turn sooner than later. 

Meanwhile, Wall Street firm JPMorgan has backpedaled on its prediction for a recession but maintains that “elevated risks” remain in the economy. The biggest wildcard for the economy right now is Fed policy and the future direction of interest rates. One thing is for sure — policymakers will have their work cut out for them for the foreseeable future.