PayPal and Block cuts to Wall Street

Adaptation to uncertainty

There are many mixed signals in the economy: Companies are laying off workers and some economists are warning of a recession, but Friday’s jobs data showed unemployment at a half-century low. Consumer confidence is falling, but consumption has proven to be somewhat robust.

All that uncertainty hangs over fintech firms, whose fortunes are tied to how willing customers are to spend and borrow. Most have seen the share price fall significantly since the start of the year.

In response, industry leaders are cutting costs. Companies known for chasing scale instead announce to Wall Street investors how they plan to streamline and focus on core businesses.

• Block reported earnings that topped Wall Street expectations on a per-share basis Thursday. But with revenue growth slowing, the firm’s management detailed plans to cut planned investments by $250 million this year, including cuts in hiring and marketing.
• “We continue to invest, given the huge market opportunities we see, but we also recognize that the environment has changed and we are prepared to adapt to uncertainty and maintain discipline by pulling back,” CFO Amrita Ahuja said.
• Similarly, PayPal said it is cutting $900 million in expenses this year, a total that includes a round of layoffs in May. These cuts could add up to $1.3 billion in full-year savings in 2023.
• “The backdrop continues to be complex,” said interim CFO Gabrielle Rabinovitch, “and we are taking an appropriately cautious approach to managing our business.”
• There are other complicating factors. Activist investor Elliott Management is pushing PayPal to focus on “operational improvements,” PayPal CEO Dan Schulman said on the earnings call. Block bet big on bitcoin, only to see its revenue fall 34% last quarter. (Excluding bitcoin, the revenue on Block was actually up 34% in the same period.)
• Robinhood and Shopify have retreated even further. During the last two weeks, the companies have dismissed respectively 23% and 10% of the employees. Executives at both companies admitted to having made bad bets that they would continue to grow at the same rate as during the pandemic.

Belt-tightening is not limited to fintech firms. With costs rising from inflation, companies across industries are seeing cuts, a recent Gartner survey shows. General uncertainty continues to be a feature of private investment markets for fintech as well.

• Fintech startups saw $24 billion in investment in the second quarter. That marked a decrease of 18% from the same period last year, according to a report from PitchBook.
• The cuts are notable for firms like Block and PayPal, which saw huge demand during the pandemic. Their share prices rose and the companies expanded.

The stock market has become particularly turbulent for fintech firms, which had high values ​​during much of the pandemic. The F-Prime Fintech index is down about 75% so far this year, compared with a 20% drop for the broader Nasdaq index. However, PayPal ended the week with its share price up 9.5% as investors reacted positively to the planned cuts.

“PayPal and SoFi probably weren’t worth what they were trading for when everyone was riding high in late 2020 and early 2021, but they are solid businesses with robust business models,” Alex Johnson, author of the Fintech Takes newsletter, told Protocol. Others, such as Robinhood, saw their share value fall due to clearer problems in their business fundamentals, Johnson added. Coinbase will report earnings on Tuesday, adding yet another data point to where the fintech market is at. Mixed signals also abound: The company is facing a legal battle with the SEC that could fundamentally change its business. The company also saw its shares jump 16% on Thursday after announcing it would offer crypto services to BlackRock.

– Ryan Deffenbaugh (e-mail | twitter)

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