Fintech stocks see red as investors confront inflation
Good morning, and welcome to Protocol Fintech. This Tuesday: There's market madness for crypto and fintech, South Korea moves forward with its CBDC, and the sector sets a funding record.
On the dailyWelcome to the second-ever daily edition of your favorite fintech newsletter. Today, Ben and Tomio looked at how the market’s gyrations affected crypto and fintech stocks, while Lindsey kept an eye on the Bank of Korea’s CBDC plans. 2021 was a record year for the sector’s VC funding — and you can expect the latest fintech deals here every Tuesday.
Fintech stocks had been some of the best-performing during the pandemic. But in recent weeks they’ve been dropping with the rest of tech.
Most fintech stocks are seeing red in 2022, even with wild swings Monday that saw tech claw back some losses. PayPal is down close to 17% year-to-date, close to its 52-week low of $152.08. Block is down 28.5% year-to-date, and at one point Monday was close to its 52-week low of $102. SoFi is down over 15% year-to-date and Affirm is down close to 39%.
Overall the market is adjusting to the Fed preparing to hike interest rates, said Mark Palmer, managing director at BTIG, which is affecting all assets, but tech in particular.
As goes tech, so goes fintech. Tech and fintech stocks have had sky-high valuations — some with price-to-earnings ratios without the, um, earnings.
- Tech stocks are often valued based on a discounted cash flow model. With interest rates set to rise, the current value of future earnings drops.
- And inflation means every penny of earnings is worth less.
- That weighs heaviest on companies where profitability is a distant goal — or where “forecast earnings power is backloaded,” said Brian Graham, partner at Klaros Group.
Despite the market gyrations, consumers still have cash to spend. That’s good news for fintech companies.
- Households squirreled away money during the pandemic. “The fact that the stock market is off a little bit doesn't change the fact that consumer balance sheets are just unbelievably strong,” Graham said.
- Consumer-facing companies should benefit from strong economic growth. Despite beaten-down stocks, Palmer sees potential for PayPal, Block and a few other names to build out their super apps this year and consolidate the fintech market.
- Block in particular could take its popular Cash App overseas, tapping unbanked or underbanked customers outside the U.S., Palmer added.
Rising rates could lift some boats. Inflation can erode consumers’ spending power, but some companies can benefit from higher interest rates.
- Roboadvisors could lure customers with higher rates on savings, Graham said.
- The mortgage market is rate-sensitive, and affordability is already a problem. But online lending could be unscathed, if credit card rates rise and the spread lenders earn on them remains the same.
The fintech sector is tech, but it’s also finance. In the short term, fintech shares will get dragged along with tech. In the longer term, what happens to the economy and interest rates may prove more meaningful. And critically, the benefits will be unevenly distributed. The nimblest will be the ones to profit.
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Thanks for reading — see you Wednesday!