Signals: can public fintechs outperform the market?

Hello, Fintech Friends!

"That escalated quickly" is probably the best summary of what happened in the stock market in July. On July 11, the U.S. Labor Department reported a month-over-month decline in the Consumer Price Index (CPI), resulting in an annual inflation rate of 3%. The inflation results have intensified the debate about the Federal Reserve keeping interest rates too high for too long, potentially causing a recession.

Nevertheless, the Federal Reserve kept the fed funds rate unchanged at its two-day meeting on July 30-31. The Fed signaled that the rate cuts are coming, but...the July jobs report, published on August 2, showed that the U.S. unemployment rate spiked to 4.3%, the highest level since October 2021. The markets dropped sharply following the report, as investors realized that the rate cuts might come too late for the Fed to achieve a "soft landing".

What's interesting is that the TWIF Index, which represents the performance of the largest fintech companies, held up better than the Nasdaq Composite and the S&P 500. Thus, as of August 2, the TWIF Index was up 18.9% YTD, compared to +11.8% and +12.1% for the Nasdaq Composite and the S&P 500 respectively.

The TWIF Index was helped by the strong Q2 2024 earnings reports from Mastercard, Fiserv, and PayPal (more on that below), as well as an okeish report from Visa. An economic recession will hurt fintech companies too. However, the key question is: can the fintech companies outperform the market if a recession comes?

Dave (NASDAQ: DAVE) continues to top the list of the best-performing fintech stocks (+297% YTD), and so far seems unmoved by the recession concerns and the new CFPB rule that might impact its core business.

We added several new names to the list, including Buy Now Pay Day lenders Sezzle 🇺🇸 (NASDAQ: SEZL) and Zip 🇦🇺 (ASX: ZIP), as well as a financial services marketplace Kaspi 🇰🇿 ( NASDAQ: KSPI). 4 of 10 fintechs in the list are non-U.S. companies.

Visa and Mastercard typically report early in the earnings season, setting the stage for the rest of the fintech companies. Visa reported global payment volume growth of 7.4% YoY on an FX-neutral basis. U.S. payment volume grew 5.1% YoY, while the payment volume in Europe grew 12.6% YoY on an FX-neutral basis. Mastercard's global payment volume increased 10.5% YoY on an FX-neutral basis. U.S. payment volume increased 6.7% YoY, while the European payment volume increased 15.7% YoY on an FX-neutral basis.

In a rare miss of analysts' estimates, Visa reported a 10% YoY growth in net revenue to $8.9 billion, and a 12% YoY growth in adjusted Earnings Per Share to $2.42. Visa still expects to deliver "low double-digit" revenue growth for the full fiscal year 2024. Mastercard, in turn, beat analysts' estimates, reporting net revenue of $6.96 billion and an adjusted Earnings Per Share of $3.59, which represents 11% YoY and 24% YoY growth respectively.

Mastercard's management highlighted "healthy consumer", strong cross-border payment volume growth, and multiple growth opportunities in Europe, the company's largest market in terms of payment volume. Thus, the company continues to benefit from further digitalization of payments in cash-rich economies such as Germany and Italy, as well as explores new monetization strategies in highly digitalized Nordic markets by investing in partnerships with fintech companies.

Read more: Visa Fiscal Q3 2024 earnings presentation and Mastercard Q2 2024 earnings presentation

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Visa stock performance: +2.4% YTD, +12.2% 1Y

Mastercard stock performance: +8.3% YTD, +18.5% 1Y

Fiserv reported its Q2 2024 results on July 24. Adjusted revenue grew 7% YoY to $4.79 billion, and adjusted Earnings Per Share grew 18% YoY to $2.13. Fiserv reports under two segments, Merchant Solutions and Financial Services. Merchant Solutions revenue increased 9% YoY, while Financial Services revenue increased 6% YoY.

Clover continues to be the bright spot for Fiserv, revitalizing the 40-year-old company. Thus, gross payment volume increased by 17% YoY, and revenue increased by 28% YoY (see chart below). Fiserv relies on its broad banking client base as one of the key distribution channels for Clover. Thus, the company works with "nearly 900 financial institutions who offer merchant processing services to their small business clients."

On the back of the strong growth, Fiserv continues to invest in improving Clover's offering, including enhancing the software capabilities (around kitchen operations, inventory, and cost management) and offering new terminals for smaller merchants (Clover Compact and Clover Flex Pocket). The company also continues to expand internationally with planned pilots in Brazil, Mexico, and Australia. The pilots will be followed by the full rollout in 2025.

Read more: Fiserv Q2 2024 earnings presentation

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Fiserv stock performance: +23.8% YTD, +25% 1Y

Jack Dorsey, Block's co-founder and CEO, dedicated Q2 2024 Shareholder Letter to the go-to-market strategy for Square. While Clover, Square's closest competitor, delivers double-digit growth, Square's growth continues to deteriorate. In Q2 2024, Square's Gross Payment Volume increased 8% YoY, while revenue increased 9% YoY (see the chart below).

Dorsey announced a reorganization of the company around functions, and appointed Nick Molnar, CEO and co-founder of Afterpay, "to lead a centralized sales function across Block, inclusive of Square." The acquisition of Afterpay "has brought a high-performing sales culture into parts of our business", and Dorsey expanded Molnar's responsibility to re-ignite growth in Square.

Square is also ramping up its partnerships, including food and beverage distributors, such as US Foods, as well as banks in Japan and the UK. During the earnings call, Dorsey mentioned that Square always excelled at product, but lagged behind the competition in the go-to-market efforts. The new partnership strategy and sales leadership are expected to accelerate Square's growth.

Despite challenges at Square, Block reported an 11% YoY growth in revenue to $6.16 billion, and a 20% YoY growth in gross profit to $2.23 billion. The company also raised the full-year 2024 guidance for most of its key financial metrics, and now expects to earn $8.89 billion in gross profit (up 18% YoY), and $2.90 billion in adjusted EBITDA (up 62% YoY).

Read more: Block Q2 2024 Shareholder Letter

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Block stock performance: -21.9% YTD, -18.9% 1Y

PayPal reported a strong quarter beating analysts' estimates on revenue, gross profit, and profitability. Total payment volume increased 11% YoY to $417 billion, revenue increased 8% YoY to $7.9 billion, and the adjusted Earnings Per Share increased 36% YoY to $1.19.

However, the most important highlight of the earnings report was probably Braintree's return to profitable growth. Thus, according to Alex Chriss, the company's CEO, "Braintree is now meaningfully contributing to transaction margin dollar growth for the first time in over 2 years." Transaction margin dollars is the company's measure of gross profitability.

Braintree has been a bright spot for PayPal in terms of payment volume growth (delivering growth rates on par with Adyen and Stripe); however, this growth did not translate into profitability (gross profit was flat despite the revenue growth, see the chart above). Under the new leadership, Braintree is "willing to accept a lower share of revenue in exchange for a higher margin contract." As a result, the company delivered the highest gross profit growth in almost three years.

In addition to repricing its Braintree offering, PayPal prepares for the full rollout of Fastlane, its accelerated checkout solution, in August. According to the company's management, 60% of online checkouts are guest checkouts, and Fastlane helps merchants increase conversions for guest checkout from 40-50% to 80%. Fastlane is PayPal's response to Shopify's Shop Pay and Stripe's Link.

Read more: PayPal Q2 2024 earnings presentation

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PayPal stock performance: +0.9% YTD, -15.3% 1Y

Coinbase delivered another strong quarter, posting $1.38 billion in revenue (108% YoY) and $596 million in Adjusted EBITDA (200% YoY). Sequentially, revenue was down (-13% QoQ) due to lower trading volume ($226 billion vs. $312 billion in Q1 2024), which was partially offset by continued growth in the Subscription and Services revenue.

Thus, Coinbase reported $599 million in Subscription and Services revenue, up 79% YoY and 17% QoQ. Subscription and Services revenue includes stablecoin revenue (the interest that the company earns on the stablecoin reserves via its partnership with Circle), blockchain rewards (staking fees), as well as other non-trading commissions such as custodial fees.

When Coinbase went public, Coinbase's co-founder and CEO, Brian Armstrong, floated an ambition to diversify the company's revenue. Thus, he expected that in 5 to 10 years, more than half of the company’s revenue would come from non-trading fees. In Q2 2024, three years since the IPO, Subscription and Services revenue represented 43% of the company's net revenue.

Read more: Coinbase Q2 2024 Shareholder Letter

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Coinbase stock performance: +17.6% YTD, +126.1% 1Y

Valuation multiples have been stable since the previous month. The multiples of fintech companies were not inflated by the AI mania, so, perhaps, fintechs will fare better than the rest of the tech sector in case the market correction continues.