Is Worldline's stock plunge a sign of trouble for the U.S.?

Bloomberg

Worldline had prepared for a shift in its payments business due to consumer worries about inflation. But it wasn't prepared enough. 

The French payment company sliced its financial outlook, saying economic conditions had dramatically worsened — creating a domino effect that led to a sharp selloff in other European payment companies. While there was no selloff in the U.S., many of the same conditions that caused Wordline's stock price to fall by more than half in one day exist globally.

"We face more challenges than we anticipated due to the economic slowdown," Worldline CEO Gilles Grapinet told analysts during the company's earnings call. 

For the quarter ending September 30, Worldline reported revenue of about $1.25 billion, up 4% from the prior year's $1.2 billion. Merchant services revenue was about $919 million, up 7.6% from about $858 million; while financial services revenue was $245 million, down 2.9% from about $258 million. But the company projected sales growth in 2023 of 6% and 7%, down from its prior guidance of 8% to 10% growth for the year. 

The impact has been particularly severe in Germany, Grapinet said. German government officials recently told Reuters that the country's GDP would decline this year due to high inflation, energy costs and slowdowns in trade. And the European Union recently cut overall economic growth forecasts. 

While inflation has been declining in the U.S. and is not as high as in Europe, it is still relatively high. And the U.S. also faces high energy costs and geopolitical risks. These factors have already caused a slump in the payments and financial technology industries, which have seen the loss of billions of dollars in valuations, as well as thousands of layoffs in the past year, following a spike in valuations and stock prices in 2021. 

"I'm just wrapping up here at [the financial conference] Money 20/20, and the atmosphere has been more anxious than usual, with the funding climate still anemic, and a lot of talk of belt-tightening," said Aaron McPherson, principal at AFM Consulting. 

Taking stock

Worldline's struggles and those of other European payment companies have not yet spread to card companies in the U.S., and under analyst questioning, Worldline's Grapinet said he was not concerned about contagion at this point. 

Worldline's stock, which trades in the European Union, lost nearly 60% of its value, falling to about $10.17 early Wednesday afternoon, down from about $24. Worldline is down by nearly 90% from its April 2021 high. The Worldline selloff sparked selloffs in other European payment stocks. Italy-based Nexi fell more than 20%, to $5.74 from about $6.18; CAB Payments fell more than 15%, to $54 from about $64; and Adyen fell more than 6%, to $687 from $718. 

In the U.S., Mastercard's stock was steady at about $386 per share at midday Wednesday. Visa's stock was up slightly at $237. American Express was steady at about $144 and Discover was also steady at about $80. 

Visa, which reported its earnings on Wednesday, projects the coming year to be "as close to a normal year as we have had in a while," but also said net revenue growth will be slower during the first half. Discover reported an increase in charge-offs in the recent quarter. American Express, which issues cards to a relatively higher-end demographic, last week reported consumer spending is expected to remain strong, and affirmed its forward outlook. Mastercard reports its earnings on Thursday. 

"I understand that the situation in Europe is worse than it is in the U.S., but it would be surprising if the rate hikes from the Fed weren't having an effect," McPherson said. "In fact, the economy has been surprisingly resilient, but it feels recessionary in the white-collar world, even if it isn't overall."

With inflation high and future economic health uncertain, Worldline reported a pivot in consumer spending away from restaurants and entertainment toward payments for more essential items such as groceries. While payment companies often get a boost in transaction fees from higher inflation, that impact can be temporary if consumers spend dramatically less or buy less expensive items.  

"When consumers cut discretionary spending, we don't grow as fast," Grapinet said. 

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Worldline also cut "thousands" of merchants from its network. Worldline did not name the merchants, and attributed the culling to an increase in cybercrime and regulations that caused the company to tighten merchant risk policies. 

"We need to take a cautious stance," said Grapinet, adding that the company believes the economic challenges are temporary. But he also said: "We are getting into an unpredictable environment." 

Worldline plans to cut more than $210 million through 2024, saying the savings will come from streamlining its platform, pushing more of its technology to the cloud and developing software to enhance the company's near-shore and offshoring capabilities. 

"We will be able to deploy our entire technology stack at scale," Grapinet said. 

Grapinet did not mention layoffs, saying it would adapt its organization with a "clear intention to be simpler, leaner and more agile."

Is Wordline's decline a warning to other firms?

While there are broader economic conditions at work, there are also some factors that are specific to Worldline, according to Eric Grover, a principal at Intrepid Ventures. 

"The collapse of the market's belief in Worldline's prospects is worse than its stock price plummeting," Grover said. 

Worldline recently acquired a 55% stake in SoftPos, a firm that sells tap-to-pay technology, enabling merchants to accept payments on smartphones without adding extra hardware. Worldline also merged with French payments company Ingenico in 2020 to boost scale and also accelerate its migration to digital payments. Worldline in 2022 sold Ingenico to a group of private equity funds. 

"Worldline was a consolidation machine, selling the market on acquiring payments businesses and attendant revenue and cost synergies," Grover said. "That narrative is starting to fray. Worldline sold off its POS terminals business to Apollo. FIS is spinning out Worldpay." 

FIS' partial spinoff of Worldpay and the series of acquisitions Nexi has made in recent years are other examples of this trend, Grover said. Nexi is reportedly considering a sale to a private equity buyer. Nexi did not provide comment for this story. 

The difference between these point-of-sale firms and companies like Adyen is that Adyen is growing faster even with a decline in its stock (which is down 77% from its high in August 2021), Grover said, adding that Visa and Mastercard have huge bases of international consumers, merchant and bank clients. 

"[Investors] were thinking about Adyen like global payment networks Mastercard and Visa, but it doesn't enjoy the same network effects and its moat isn't nearly as deep or wide," Grover said. "Mastercard and Visa enjoy significant pricing power."

McPherson also said the contagion could be limited. Given the strength of the broader economy, slower growth is more likely than negative growth, McPherson said. 

"Equities are also under pressure more generally as bond yields become more attractive, so that may be behind the larger drops we are seeing," McPherson added.