ARKF - Fintech Stocks In Focus As European Slowdown Weighs On Sector

2023-11-07 11:16:40 ET

Summary

• Worldline reports disappointing Q3 earnings results, leading to a sharp decline in its stock and impacting other payment companies.
• Over the last two weeks, shares in both Worldline and Paycom corrected sharply in the wake of earnings.
• So far, American fintechs such as Block and PayPal have fared slightly better, but that could change if the U.S. economy falls into recession.

By Andrew Prochnow

Already facing substantial challenges over the past couple of years, the fintech sector encountered further setbacks on Oct. 25 when Worldline (WRDLY) reported disappointing Q3 earnings results .

In addition to revising its full-year earnings outlook downward, Worldline disclosed a decline in its operating margins, which contradicted the company's prior guidance. Furthermore, Worldline indicated that organic sales growth would be lower than initially anticipated in the foreseeable future.

Worldline attributed the weaker earnings forecast to a slowdown in economic conditions in Europe.

The market's response was swift and definitive, with WRDLY shares plummeting by approximately 60% following the earnings report. Over the past 52 weeks, Worldline's stock has now dwindled by nearly 80%, plunging from $21.50 per share to $7.30 per share.

With the financial sector already on fragile footing due to the ongoing regional banking crisis , it wasn't surprising to see investors and traders flood the Worldline exit doors. Year-to-date, the well-known regional banking ETF-the SPDR S&P Regional Banking ETF ( KRE )-is down more than 25%.

Worldline, with its headquarters in France, saw the most significant impact on payments companies with a strong focus on Europe on October 25. For instance, shares of Nexi SpA (NEXI), an Italian-based payments company, experienced a 13% decline on that day and a nearly 32% drop over the past year.

In the United States, prominent payments companies like Block ( SQ ) and PayPal ( PYPL ) also felt the impact. SQ shares were down approximately 7% on October 25, while PYPL shares declined by around 4.5%. Unfortunately, the challenges faced by Worldline seem to be just the beginning.

On the evening of Oct. 31, another payments provider, Paycom (PAYC), reported disappointing Q3 results. The following day, PAYC shares plummeted by 40%, falling from $245 per share to $150 per share.

While Paycom showed a healthy 21% revenue growth in Q3, similar to Worldline, its forward guidance was worse than anticipated, leading to further downward pressure in the broader fintech sector.

One of Paycom's counterparts, Paylocity ( PCTY ), has also experienced a roughly 20% decrease since Paycom's earnings report on Oct. 31. Furthermore, the fintech-focused ARK Fintech Innovation ETF ( ARKF ) has seen a decline of about 17% since its peak above $24 per share at the end of July.

2023 performance in the broader fintech sector is highlighted below:

• Affirm ( AFRM ), +146%
• Upstart ( UPST ), +135%
• SoFi ( SOFI ), +78%
• Futu ( FUTU ), +55%
• UP Fintech ( TIGR ), +49%
• ARK Fintech Innovation ETF ( ARKF ), +42%
• Flywire ( FLYW ), +19%
• nCino ( NCNO ), +12%
• Payoneer Global ( PAYO ), +5%
• Global X FinTech ETF ( FINX ), +3%
• Toast ( TOST ), 0%
• Shift4 Payments ( FOUR ), -8%
• Marqeta ( MQ ), -10%
• Green Dot ( GDOT ), -23%
• Fidelity National ( FIS ), -24%
• Paylocity ( PCTY ), -25%
• PayPal ( PYPL ), -25%
• LendingTree ( TREE ), -25%
• Block ( SQ ), -25%
• Adyen ( ADYEY ), -45%
• Paycom ( PAYC ), -48%
• Worldline ( WRDLY ), -63%

The Downturn in Payment-Centric Fintechs Commenced in 2021

Q3 earnings haven't been favorable for fintech companies focusing on payments, but the sector's decline began well before 2023.

For instance, Block has witnessed a 34% decrease in its shares in 2023. However, since August 2021, Block's shares have plummeted by a remarkable 82%. Interestingly, though, Block released its Q3 earnings report on Nov. 2, and it seemed to defy the broader trend.

Rather unexpectedly, Block reported revenues and earnings that surpassed expectations for its most recent quarter. In contrast to Worldline and Paycom, Block actually raised its full-year guidance, indicating the potential for a subtle turnaround within the company.

Block's shares have been under pressure since its $29 billion acquisition of Afterpay in 2021. The integration of Afterpay has encountered challenges, with many experts suggesting that Block may have overpaid for an acquisition that has introduced an elevated level of credit risk to the combined entity.

During the first half of this year, Block reported approximately $310 million in consumer loan losses, a significant increase from the $69 million reported in the first half of 2022.

As if all that wasn't enough, Hindenburg Research released a short report on Block earlier this year.

Considering all of the aforementioned negatives, it's a bit easier to understand why Block shares are trading near multi-year lows.

Interestingly, PayPal ( PYPL ) also reported better-than-expected earnings on Nov. 2. Revenues at PayPal rose by about 8% as compared to the year prior. On top of that, total payment volumes also increased by 15%.

Better than expected Q3 earnings at Block and PayPal likely stem from continuing strength in the U.S. economy, which grew by 4.9% in Q3. In contrast, the Euro region registered flat growth of 0% in Q3, which probably helps explain why American payment providers outperformed their European counterparts.

It should be noted, however, that despite the recent earnings beat, shares in PayPal are down more than 80% since July of 2021, mirroring the returns in Block over that same period.

One of the main complications for PayPal was the decision by eBay ( EBAY ) to replace PayPal with Adyen (ADYEY) as its preferred payments provider. An especially surprising turn of events given that eBay is the former parent company of PayPal.

That said, shares in Adyen haven't fared much better than Block and PayPal, especially of late. So far in 2023, shares in Adyen have declined by about 45%, as highlighted below.

The Advent of a 2024 Recession May Pose Challenges for U.S. Fintech Companies

For long-term holders of Block and PayPal, the recent Q3 earnings reports were no doubt welcome surprises.

However, with the Euro economy already softening, and the U.S. economy expected to follow suit , it seems likely that American payment providers will experience a drop-off in business activity at some point in late 2023, or early 2024.

Highlighting these concerns is the fact that PayPal's forward guidance fell short of expectations, despite the company exceeding expectations in Q3. Analysts were initially anticipating Q4 earnings of around $1.40 per share, but PayPal recently revised this down to about $1.36 per share.

Block presented a slightly more optimistic outlook for ongoing revenue and earnings in Q4. Nevertheless, if the U.S. economy indeed experiences a slowdown in H1 2024, it's challenging to envision a scenario where PayPal's business is negatively affected while Block's remains unscathed.

Both companies have witnessed significant share price declines since mid-2021, but this doesn't necessarily translate to them currently offering substantial value. With the looming risk of a U.S. recession, it might be more prudent to adopt a wait-and-see approach rather than initiating new long positions in either Block or PayPal.

At present, investing in either company resembles trying to catch a falling knife, particularly considering the recent corrections in Worldline and Paycom shares.

Even if the U.S. economy manages to avoid a recession in H1 2024, GDP growth is unlikely to be robust, indicating that the risks in the fintech sector likely outweigh the potential rewards at this point.

Nonetheless, should share prices further correct and the economic outlook for the U.S. economy brightens, it may be worthwhile to reconsider potential share acquisitions in Block and PayPal.

Andrew Prochnow has more than 15 years of experience trading the global financial markets, including 10 years as a professional options trader. Andrew is a frequent contributor Luckbox Magazine.

For further details see: