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PayPal Q1 Earnings: Revenue Beat and Optimistic Outlook Despite Market Challenges

Paypal (PYPL) $70 Pre-Market up 7%.

Maintaining Buy, at this price there’s little downside and Paypal seems to be walking the talk with steady increases in revenue in an overcrowded market. Paypal is a mature company and getting 12-15% a year is pretty good.

Q1 revenue of $7.70B, topping the $7.52B consensus, fell from $8.03B in Q4 2023 and grew from $7.04B in Q1 2023.

Q1 Non-GAAP EPS of $1.40 beats by $0.18.

Guidance

Non-GAAP earnings per diluted share are expected to increase by a mid-to-high single-digit percentage compared to $3.83 (based on the new non-GAAP methodology) in the prior year.2024 is a transition year, righting a ship that had screwed up quite badly for the past three years and I think they should be able to do a decent job. 

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Fintech

Marqeta (MQ) at $5.35: Promising Growth Amid Challenges in a Competitive Market

Marqeta (MQ) $5.35

Marqeta is a credit card processor with clients like Block (Square), Affirm, and DoorDash.

Marqeta should grow in 2025, after two years of a slowdown in 2023 and 2024 (estimated). 

Total Bookings with new clients and expansions with existing clients are growing well at over 50% and 60%. They’ve also done a good job on cost reduction.

The stock, though, could likely stagnate since they’re far from profitability. The other negative is that this is a commodity business with a lot of strong older players and several new upstarts, without any real competitive advantages. But Marqeta has a strong business relationship with Block, (51% of business) so that’s a plus, and their contract is in place through 2028.

The valuation is around 5X sales, and once growth resumes should be seen as cheap.

I think it’s worth looking into around $5. I’ll keep an eye on updates.

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Fintech

MoneyLion: A Fintech with Roaring Potential but Credit Risks to Watch

source

MoneyLion (ML) $76, Fintech

Positives

Diverse base of revenue (subscription fees, interchange, interest, etc.).

Both consumer and fast-growing enterprise segments, with more than 1.1K channel partners, enterprise now accounts for about one-third of its overall revenue.

The online marketplace for third party vendors is a great idea to increase its offering options in areas like insurance, credit cards, and mortgages. At the end of Q4, about 48% of the products used by its customers were from third parties, up from 26% at the end of last year, showing its expanding marketplace.

ML management striving for GAAP profitability should be a positive catalyst.

Ernst & Young, EY partnership is also positive.

Customer acquisition costs are low at $15, they can expand without hurting profits.

Negatives and Risks

The biggest risk is credit – so far it has been under control, but as we’ve seen with Fintech, things start spiraling out of control very fast, without proper guardrails in place.

Credit quality remained steady. Its provision expense as a percentage of total originations was 3.4% for the full year – THIS MUST BE WATCHED FOR DETERIORATION. Management usually warns and expects over 4% of losses so they’re not downplaying the credit risk.

Valuation

112x adjusted earnings per share, with the hope of 300% growth in 2025. Much lower on adjusted earnings. Still high, but if earnings materialize the P/E drops to 26. Clearly the lion needs to roar.

If you have the capacity for some credit risk, this is potentially good and can return in excess of 20% per year.

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Fintech

Block Inc (SQ) at $66: HOLD, Profitability Focus Could Unlock Value

source:

Block Inc (SQ) $66 Previously known as Square. HOLD

Square has underperformed the market in the last 5 years in a big way, with a negative total return of 10%. When it started, it showed a lot of promise in a cyclical commodity industry of payment processing with the ease of installation, mobile applications and payments, good easy user interface, which differentiated it from the crowd. The Cash app also promised a good deal, with solid growth for years, and is now being well monetized. But the focus on crypto turned off investors from these strengths, especially when Block’s crypto trading account is heavily exposed to crypto performance and pricing. For example, out of $16Bn in 9 months of last year’s revenue, $7Bn was crypto trading VOLUME with a cost of $6.86 Bn with only $140Mn in gross commissions. Institutional investors and analysts like me object to such a loose interpretation of revenue accounting – Square is not a $16Bn company it is a 9Bn company. Secondly, out of the 25% revenue growth in the last 9 months, crypto volume grew 30% compared to the rest of the company’s 21% growth.

The rest of the payment processing business is good, but not GAAP profitable and for a company that has been around for 15 years, that is a sticking point – Stock Based Compensation for the last nine months was almost $1BN so that is going to take a while. However, adjusted operating profits are over $500Mn so that’s a plus and operating cash flow was $450Mn, decent but only 5-6% of revenues.

That said, this company has a lot of scope, especially in its cash application, which now has $22Mn MAU’s Monthly Active Users, and is growing well. Management has promised operating cost discipline in their last call, they have to – there are no significant, sustainable long term competitive advantages in payment processing – it’s a cookie cutter business, with some new wrinkles every few years.

Bottom Line – We saw how well Meta got rewarded last week with their focus on profitability, so if Block continues to execute and focus on it – this could be a surprise and a good gain. The stock has moved up more than 70% from its 52 week low of $39. The valuation is not bad with a P/E of 25x adjusted earnings with adjusted EPS growth of 25%

I would wait till I saw further signs of good execution.

Categories
Fintech

Upstart (UPST) at $32.50: Why It’s Best to Avoid for Now

source:upstart

From 2017 to 2021, Upstart grew at a frenetic pace of 70%, before higher interest rates, funding constraints and higher defaults led to a massive decline in revenue.

Upstart was supposed to be an agnostic “Fintech” marketplace without credit exposure, but they made the mistake of taking auto loans on their books, which completely negated the buying/bullish case.

Upstart has boosted its capital but even at its latest earnings call, management stated Upstart’s ability to approve borrowers is constrained due to a macroeconomic environment of low consumer savings and high credit default rates.

Right now revenue growth forecasts are low and there are no clear indications of a turnaround – sure lower interest rates and better participation from banks and other financial institutions could be tailwinds in the second half.

Interestingly, while researching this one, I looked at Sofi Technologies (SOFI) and Pagaya (PGY), which are in much better shape, much more resilient and could be winners. Pagaya has executed well in the high interest rate downturn. Both are on the riskier side, and I will update later today.