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Payments space has seen ‘a mountain of growth,’ analyst says

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Mizuho Senior Financial Technology Analyst Dan Dolev joins Yahoo Finance Live to discuss earnings report data for PayPal, digital payments, and the outlook for Robinhood amid reports that the company will lay off 9% of its full-time employees.

Video Transcript

JULIE HYMAN: More trouble for Robinhood after the platform announced plans to lay off 9% of full-time employees. This coming after the company saw an 80% spike in headcount between March and December of 2021. Joining us now to discuss is Mizuho senior financial technology analyst, Dan Dolev. Dan, more trouble or not more trouble? I mean, maybe this is the company trying to sort of rationalize or right the ship after what has been quite stormy seas, so to speak. What do you think here? Is this the right thing for them to do, and what else do they need to do?

DAN DOLEV: Yeah, look, thanks for having me on the show. It's [AUDIO OUT] to be here. Very, very important to Robinhood is, they went public. Let's just start from the beginning. They went public at the most craziest, most exuberant time for trading, right? If you remember, you're going back to last year, Q1, Q2. So they definitely overhired. And if you look at their revenue-- so we did some work last night. If you look at the revenue per employee stats, they're actually, their efficiency stats, they're actually quite low, right?

So they're in the high 400s. Their peers are 500,000, 600,000 revenue per employee. So they definitely overhired. They need to trim the employees. I mean, is it great news? Probably not. But does it bring them back to Earth? That's probably the thing. So I think it's kind of back to, call it, square one and, like, making sure that this business starts to work in a non-COVID environment.

BRIAN SOZZI: Dan, is Robinhood a public company a year from now?

DAN DOLEV: Yeah.

BRIAN SOZZI: Why would that be the case?

DAN DOLEV: I mean, I can't-- I don't have a crystal ball. But if it's not a public company, maybe it gets acquired. But I think Robinhood is here to stay because everyone we talked to-- this is a very, very good question. Everyone we talked to-- and I talked to a lot of young people-- their interface is better than everyone else. People love it. People that are on it love it. The interactions, right?

The number of interactions per week, per month, is light years above all the other apps, even the ones that we like, right? Even the cash apps, et cetera, that we like. So the business or-- the business is very good. What they're suffering from is just this post-COVID hangover. And it's very harsh. But it doesn't say anything about the fundamental value proposition of the business.

BRIAN SOZZI: And that's what I'm getting at, Dan, because the platform is, it's slick. It works well. There's a lot of loyal people on that platform, but do you think it makes sense as part of someone else's portfolio, where they can help perhaps scale it up even quicker and do it more efficiently?

DAN DOLEV: Yeah, so that's the question. I mean, again, I don't-- I can't predict these things, but I think there's going to be definitely a lot of value in Robinhood. And I don't want to put out specific names, but there is-- if push comes to shove, if things really deteriorate from here, I think there's a lot of value in what they offer. Again, the feedback that we're getting from people that use it is that they have the best interface. And I think that they've really invented something that their peers or, kind of, the more sleepy peers don't have. And they have a following. People like it, so it's a really good product.

JULIE HYMAN: I--

DAN DOLEV: It just happens to [AUDIO OUT] public right at the peak of the all-time trading group.

JULIE HYMAN: I want to transition to some of the other companies that you cover elsewhere because, obviously, there's a lot of news out today, and there's more coming, from PayPal after the bell. Visa numbers looked pretty strong here. And it's interesting that you're getting some concern about economic growth, about cyclicality from some earnings reports. I don't really see that in these Visa numbers, right?

DAN DOLEV: Not at all. And I think the results were good. Remember, I'm neutral in Visa, and we actually downgraded Visa earlier this year. If you think about the results for Visa, they're very strong. I don't take anything away from it. But it's mostly driven by the comeback and cross-border revenue, right, which has been sort of the number one factor.

If you remember kind of the economics, the way Visa makes money, the take rate or the yield on cross-border is a 10x factor versus the normal. So if they get paid $0.10 on a regular transaction when you go to Starbucks or 10 basis points, so to say, then they get paid hundreds basis points if you go to Starbucks in a different country. Right? So it's a massive increase in the take rate.

So because people are traveling-- I was in Europe. I'm sure a lot of people are traveling. Spring break, post Army Corps, and people are traveling. Bookings for the summer are strong. This drives a lot of revenue for Visa, a lot of high margin revenue, which is great. And it's amazing. The question is, how sustainable is it once you lap it?

And the key question that we're asking is the strength of the US debit business, which is, what's subject to account to account payments now, long-term? I'm looking at these things long-term. And I think long-term, Visa isn't as strong as it was, or the moat is not as strong as it was, say, five years ago. But still, it's a great trade. I don't take anything away from it.

BRIAN SOZZI: Dan, when you're out there talking to clients, is there any sense that they are about or nearing a point where they're going to step in here and buy some of these beat up fintechs on weakness? And then secondarily, why have we seen this weakness in the space?

DAN DOLEV: I call this FIFO, but not the FIFO you think of. It's First In First Out, but not from an accounting perspective. Payments-- and we've actually done work on this. This is an excellent question, by the way. Payments has been one of the early beneficiaries-- I'm talking as a sector as a whole. Payments has been one of the early beneficiaries of the COVID trading, right? You mentioned Robinhood. You think of, like, what PayPal was back in, like, early 2020, et cetera.

So because they've seen such a mountain of growth, the lapping of these comparisons in a two-year stack basis is very harsh. The work that we've done, we've looked at 75 to 100 payment stocks versus other stocks in tech. What you're seeing is that the two-year stack, i.e. the growth this year, plus the growth last year on a quarter to quarter basis, is the number one predictor of stock performance.

If things stay the way they are and they're actually looking better than what we would have thought, you're going to see a massive snapback in expectations in the second half and the two-year stack reaccelerate, which means that all these payments stocks are going to do extremely well in the second half. So I think the buy side is waking up to it. I think what you're seeing today is probably the beginning of it. I'm very bullish on payments. First in, first out. They were the first to benefit, they were the first to suffer, and they're going to be the first to benefit in the second half.

JULIE HYMAN: And so super quick, Dan, you would include PayPal in that thesis?

DAN DOLEV: I'm bullish on PayPal on the business. I'm bullish on the brand. I think they've got issues. I am worried about the Check Out button. You saw what happened with Fast, right? Which is, like, the one-stop-shop checkout. I'm worried that this space is becoming hyper competitive, and I worry about this management's ability to kind of reinvent itself.

So I'm bullish on the PayPal brand. I just think it needs maybe someone to take a comprehensive look at how you kind of re-energize that brand. But it's an amazing brand, right? I mean, this is a true global online e-commerce network, just like Visa and Mastercard are for credit and debit.