What happened
The market hasn't been kind to fintech stocks PayPal (PYPL 2.50%), Block (SQ 2.68%), and Coinbase (COIN 3.31%) ahead of their third-quarter earnings releases after the market closes. Yesterday the Federal Reserve increased interest rates and said it expects to keep moving rates higher, while earnings results have been mixed over the last few days. That's making investors cautious ahead of today's results.
Shares of PayPal fell as much as 5.2% in early trading, Block dropped 6%, and Coinbase was down 4.9% at its low. Shares are down 2.1%, 1.3%, and 2.2%, respectively, at noon ET.
So what
Investors don't quite know what to expect from earnings at these financial institutions. All three have exposure to the crypto market that has been down badly in 2022, but they're also dependent on increasing economic activity and digital payments for growth. That growth is being questioned more than ever as interest rates rise and many observers expect we are heading into a recession.
The first thing investors will do is compare results to estimates by Wall Street analysts, so I'll lay out those expectations. PayPal is expected to generate $6.82 billion in revenue and $0.96 per share in earnings, and Block is looking for $4.49 billion in revenue and $0.23 in earnings, while analysts think Coinbase will have $654 million in revenue and a loss of $2.40 per share.
What investors should be looking at is growth in gross payment volume (or trading volume, in Coinbase's case), which measures the money retailers are selling through their ecosystems. Subscription revenue will be the next line item to look at because this is where high-margin services are sold. Finally, conference calls will be important because this will give investors an idea what management sees in the future for each of these companies.
Now what
Each of these stocks has gotten clobbered in the market over the past year, and it's not clear where the bottom is. Investors are looking more for profitability and cash flow right now than growth, so these former growth darlings will have to adapt.
As compelling as it may be to buy stocks like this while they're down, I would be cautious before earnings. Management will often give their outlook for the business and economy, and all three of these companies will have important views on where operations are headed.
I will be looking at how these companies are adjusting their workforces and fixed costs in today's environment. Cutting costs is going to be very important for these companies, and that's not something they're used to doing. How quickly they make the shift to focusing on the bottom line compared to the top line may tell us a lot about where these stocks are headed.
