It’s not been a good week if you’re a fintech investor, with the industry being beaten to death by the discovery of the new variant of the omicron coronavirus and concerns over a higher and longer-term inflationary environment.
Actions to buy now, pay the company later To affirm (NASDAQ: AFRM) traded about 23% less this week at 2:47 p.m. ET today. Actions of the ordering party of artificial intelligence Holdings reached (NASDAQ: UPST) traded nearly 19% lower, shares of the one-stop financial services firm SoFi Technologies (NASDAQ: SOFI) traded more than 19% less, and digital market bank stocks Loan Club (NYSE: LC) traded almost 20% less.
The discovery of the omicron variant hurt the market at large, but seemed to really hammer fintech stocks in particular. These businesses are in the business of providing loans, which can be very economically related. Clearly, if it were necessary to continue the lockdowns, it could erode the credit quality of borrowers on these loans and dry up demand in what was supposed to be a promising economy in 2022.
The double whammy for the sector came when Federal Reserve Chairman Jerome Powell told Congress he would “withdraw” the use of the word “transitional” when discussing currently higher inflation levels , which means he thinks he could be here to stay. The Fed has also indicated that it will potentially seek to accelerate the reduction of its massive bond buying program, implying that interest rate hikes look more like a certainty in 2022. Bank of America now predicts that the Fed will hike its fed funds rate three times next year. This is in stark contrast to economists’ predictions at the start of the year that rate hikes would only take place in 2024.
While higher rates mean higher returns on loans that charge interest, they also increase the cost of borrowing for the consumer, which usually results in higher default rates, which can typically be higher in business. some of the lending segments in which these fintech companies operate. A few months ago, a new study from Credit Karma showed that a third of American consumers who tried to buy now, pay later for products missed one or more payments. Now most buy now, pay later, lenders don’t charge interest, but if everything else in a borrower’s life becomes more expensive, it doesn’t bode well for them to pay off those loans.
Higher interest rates are also bad for fast growing companies because they increase the cost of doing business and hamper profit growth. Several of these fintech companies had reached valuations so high that any blow to growth could only lower their stocks and valuations.
For some of these fintech companies, I think the market has just been raising valuations too quickly and getting ahead of itself.
As you can see, it wasn’t that long ago that Upstart and Affirm were trading at 40 times revenue and Upstart even hit 60 times revenue even briefly. Now, valuations look better, although some remain high.
I continue to cast my full conviction behind LendingClub in particular, which in my opinion has been completely misunderstood and abused by the market. As I have noted in the past, the company is now showing similar numbers to SoFi and Upstart and is not rated even at the same stage as either.
Ultimately, with the potential for difficult market conditions in 2022, I would focus on valuation. These companies all have great potential, but there is still a lot to be done and proven.
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