Signals: Public fintechs are becoming affirmatively profitable

Hello, Fintech Friends!

Central bankers from all over the world met at the Jackson Hole Economic Policy Symposium, and jointly concluded that the fight against the inflation is going according to the plan, so it is time to cut rates. "The time has come for policy to adjust", said Jerome Powell, after the symposium.

"The timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks," added the Chairman. As of this writing, the market assigns a 70% probability of a 25bps rate cut and a 30% probability of a 50bps rate cut the Federal Reserve's September meeting.

Fintech companies, in the meantime, continued to report their Q2 2024 results. We saw many strong reports with a common theme: fintech companies continue to grow, and they continue to grow profitably. The TWIF index is up +25.1% YTD and continues to outperform Nasdaq Composite (+11.2% YTD) and S&P 500 (+13.4% YTD).

The fintech industry didn't die in this rate hiking cycle. Many of them came out of this cycle stronger. Let's see what the future holds when the rates start coming down.

Jevgenijsp.s. Have feedback? Just ping me on X/Twitter. Happy to hear what we can improve in this column!

With Sezzle (NASDAQ: SEZL), Dave (NASDAQ: DAVE), and ZIP leading the list of the best-performing fintech stocks, we can probably call 2024 the year of "back from the dead" companies. Thus, last year Sezzle, at its lowest point, had a market cap of $47 million ($0.75 billion now), Dave had a market cap of $54 million ($0.47 billion now), and ZIP (ASX: ZIP) had a market cap of $130 million ($1.81 billion now).

Adyen reported its Q2 2024 and H1 2024 results, proving once again that it is one of the best payment companies in the world. Processed volume in the first half of 2024 increased 45% YoY to €619.5 billion, net revenue increased 24% YoY to €913.4 million, and EBITDA increased 32% YoY to €423.1 million.

Last summer, the stock plummeted by over 50% after the company reported its H1 2023 results. Investors became concerned about slowing revenue growth in North America (see the chart below). This time around, Adyen reported a 25% YoY revenue growth in EMEA, its largest market, and 30% YoY revenue growth in North America.

"If you look at last year, we heard some noise around other competitors being very aggressive on price. We always kept focusing on value, and I think that starts to pay off. And if you think about it...have we really fundamentally changed something to our product offering? The answer is no." commented Ingo Uytdehaage, Adyen's co-CEO.

By "other competitors" Adyen's co-CEO meant PayPal's Braintree, which tried to deliver growth at the cost of profitability. As we wrote in last month's issue, PayPal's new management started prioritizing profitability, which translated into revenue growth deceleration for Braintree...and as we now know, revenue growth acceleration for Adyen.

And to make things even more exciting...PayPal announced that it partnered with Adyen to distribute its accelerated checkout solution Fastlane. Fastlane will get to onboard users in Adyen-powered checkouts, and, in return, Adyen will benefit from all Fastlane users onboarded in checkouts powered by Braintree and PayPal. Combined, Adyen and Braintree process more payments than Stripe, so sounds like a powerful partnership.

Read more: Adyen H1 2024 Shareholder Letter

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Adyen stock performance: +8% YTD, +65% 1Y

Speaking of accelerated checkouts...Shopify also reported its Q2 2024 results in August. Gross Merchandise Volume (GMV) increased 22% YoY to $67.2 billion and Gross Payment Volume (GPV) increased 30% YoY to $41.1 billion. 61% of GMV on the Shopify platform was processed by Shopify Payments, up from 58% in 2023, and 53% in 2022.

Moreover, Shop Pay, the company's accelerated checkout solution, "facilitated $16 billion in GMV". The payment volume "accelerated" by Shop Pay grew by 45% YoY and accounted for 39% of Shopify Payments' total volume. Previously, Harley Finkelstein, Shopify's President, set an ambitious goal of "making Shop Pay the default checkout on the Internet." No wonder why PayPal is putting so much effort into rolling out its alternative to Shop Pay, Fastlane.

Nevertheless, while PayPal is trying to catch up with Shopify in accelerated checkout capabilities...Shopify is rapidly expanding into in-person commerce. Thus, in Q2 2023, the company hit the milestone of $1 trillion in cumulative GMV processed on the Shopify platform of which $100 billion was processed via Shopify POS. Shopify also "rolled out point-of-sale terminal to 8 additional countries", now offering the solution in 14 countries.

Shopify estimates that offline payments represent a $459 billion revenue opportunity, which is a much bigger opportunity for the company than the $157 billion revenue pool in online payments. In 2023, Shopify generated $441 million in revenue from supporting its merchants in offline commerce, which represented almost 6% of the company's total revenue and a fivefold increase from 2019.

Read more: Shopify Q2 2024 Earnings Presentation

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Shopify stock performance: -14% YTD, +2% 1Y

Affirm and Klarna, two leading Buy-Now-Pay-Later players, reported their Q2 2024 results too. Thus, Affirm reported a 31% YoY growth in Gross Merchandise Volume (GMV) to $7.2 billion and a 48% YoY growth in revenue to $659 million. Klarna reported a 16% YoY growth in GMV to SEK 276 billion ($26.8 billion) and a 25% YoY growth in revenue to SEK 6.9 billion ($670 million).

However, the highlight of the earnings call was Affirm's commitment to reach GAAP profitability in Fiscal Q4 2025 (calendar Q2 2025). Affirm has been profitable on an adjusted basis for five consecutive quarters and has been consistently cutting operating losses as it continues to gain scale. Similarly, Klarna has approached a point of achieving profitability on a non-adjusted basis (see the charts below).

Both companies reported their peak losses in 2022, and had to revert to layoffs to adjust to the new reality. Klarna executed two rounds of layoffs in 2022, reducing its headcount by more than 10%, while Affirm delayed layoffs until early 2023, cutting 19% of its workforce. Nevertheless, both companies continued to grow GMV and revenue, which is translated to declining operating losses.

"We intend and expect to be profitable on a GAAP basis in our fourth fiscal quarter [ Q2 2025 ], and plan to operate the business while maintaining GAAP profitability thereafter," - wrote Max Levchin, Affirm founder and CEO, in the shareholder letter. Affirm and Klarna are proving that BNPL businesses can be profitable at scale. Let's move on from the thesis that BNPL was a ZIRP phenomenon and start discussing what's ahead for these businesses.

Read more: Affirm Fiscal Q4 2024 Shareholder Letter & Klarna H1 2024 Update

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Affirm stock performance: -22% YTD, +74% 1Y

Toast reported a strong second quarter, joining its rival Shift4 in reaching GAAP profitability. Thus, in Q2 2024, the number of served locations increased 29% YoY to 120,000, Gross Payment Volume (GPV) increased 26% YoY to $40.5 billion, and revenue increased 27% YoY to $1.24 billion. The company reported Net income of $14 million, compared to Net Loss of $98 million a year ago.

However, GAAP profitability was expected sooner or later, and investors were eager to hear about the next frontier for the company - its progress in international expansion. Thus, Toast already serves more than 13% of restaurants in the U.S., so the company expanded to the UK, Ireland, and Canada last year. As of Q2 2024, or a year after the expansion, the company served 2,000 restaurant locations outside of the U.S.

While Toast is expanding organically, its closest competitor, Shift4, is pursuing an acquisition strategy. Thus, the company entered the European market through an acquisition of Finaro in 2023, and this summer announced the acquisition of Vectron, "one of the largest European suppliers of point-of-sale (POS) systems to the restaurant and hospitality verticals." Vectron has 65,000 POS locations across Europe and a network of 300 distribution partners.

"This deal really highlights our M&A formula at its finest. The transaction provides a massive scale in support of our European expansion strategy. With the support of the management team, we will blow-up the revenue model, cross-sell restaurant and hotel payments, enhance the value prop of their current offering and eventually pivot the customers to SkyTab," commented Jared Isaacman, Shift4 founder and CEO, on the acquisition of Vectron.

Read more: Shift4 Q2 2024 Shareholder Letter & Toast Q2 2024 Results Press Release

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Toast stock performance: +28% YTD, +9% 1Y

Shift4 stock performance: +2% YTD, +33% 1Y

Nubank did what Nubank typically does - smashed all analysts' estimates. Thus, in Q2 2024, analysts expected Nubank to report $464 million in Adjusted Net Income, but the company reported $563 million. On a non-adjusted basis, Nubank's Net Income increased to $487.3 million, up 116% YoY from $224.9 million in Q2 2023.

Nubank is playing in a league of its own, posting unprecedented growth rates while improving profitability. Thus, Nubank added 5.2 million new customers during the quarter (20.8 million during the last four quarters), reaching a total of 104.5 million customers. Deposits increased 64% YoY, interest-earning loan portfolio increased 81% YoY...while the Return on Equity improved from 17% in Q2 2023 to 28% in Q2 2024.

Nubank eventually becoming the most profitable bank in Brazil is now a consensus, as the company's market cap now confidently exceeds the market cap of the country's largest banks, Itau, Banco do Brasil, and Banco Bradesco (see the chart below). Thus, investors are closely tracking Nubank's progress in Mexico and Colombia.

Nubank's footprint in Mexico and Colombia is much smaller than in Brazil, but the company has a blueprint and ample financial resources given its profitability in the home market. In Q2 2024, Nubank added 1.2 million customers in Mexico, bringing the total to 7.8 million customers, and 0.4 million customers in Colombia, bringing the total to 1.3 million customers. 

Read more: Nubank Q2 2023 Earnings Release

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Nubank stock performance: +65% YTD, +99% 1Y

With so many fintech companies reaching profitability (on either an adjusted or non-adjusted basis), we have decided not to publish NTM Enterprise Value / Sales multiples and, instead, publish NTM Price / Earnings multiples.