Nearly half a trillion dollars has been wiped from the valuation of once high-flying fintech companies that profited from the IPO boom at the start of the pandemic.
More than 30 fintechs have listed in the United States since the start of 2020, according to data from CB Insights, as investors locked in on companies they believe could benefit from a long-term transition to digitization accelerated by the pandemic.
However, concerns over rising interest rates, lack of earnings and untested business models as the economy heads into a potential recession have put them at the end of this year’s sell-off.
Shares of recently listed fintechs have fallen on average more than 50% since the start of the year, according to analysis by the Financial Times, compared to a 29% drop in the Nasdaq Composite. Their cumulative market capitalization has fallen by $156 billion in 2022. If each stock is measured from its all-time high, about $460 billion has been lost.
A second quarter update from online lender Upstart last week illustrated the challenges facing many fintechs. The company, which says it uses artificial intelligence to make consumer loan decisions, blamed the “tumultuous economy” for slowing revenue growth and increasing losses.
This was exacerbated by an exceptionally strong result in the same quarter last year, when the contrast to the economic lockdowns in 2020 resulted in annual revenue growth of over 1,000%.
The pressures have also hit more established companies like PayPal and Block – formerly known as Square – which have lost nearly $300 billion in market capitalization between them this year.
Falling public market valuations have trickled down to private companies. Klarna slashed its price from $46 billion to less than $7 billion in a private funding round earlier this month, and The Wall Street Journal reported this week that Stripe had cut its internal valuation by more than $7 billion. A quarter.
Dan Dolev, an analyst at Mizuho, said fintechs – especially digital payment companies – were “the first part of the tech sector to benefit greatly from Covid, as everyone was stuck at home and buying things online.
“Now they are over-correcting down before other sectors as well.”
Dolev said he expects to see a rebound for many companies in the second half as year-over-year comparisons become more flattering.
Some companies are also under additional pressure from regulators. The Securities and Exchange Commission is reviewing perceived conflicts of interest created by ‘payment for order flow’, online brokerage Robinhood’s main source of revenue, and SEC Chairman Gary Gensler has called for oversight clarity of the cryptocurrency markets. The Consumer Financial Protection Bureau also launched a survey of “buy now, pay later” companies last December.
The results of traditional financial services were also affected. Wells Fargo on Friday charged a $576 million write-down of its investment portfolio for missing analyst earnings expectations. Wells Fargo Strategic Capital was one of the biggest fintech investors last year, according to CB Insights.
Despite the litany of challenges, many investors still support the sector. Cathie Wood’s ARK Fintech Innovation ETF, one of the most popular funds dedicated to the sector, has fallen 62% this year, but net outflows have been below $90 million, eclipsed by the $2.7 billion dollars in admissions over the previous two years. After a sharp decline earlier in the year, investors have added $31 million net since early June.
Pedro Palandrani, director of research at Global X, which runs another fintech-focused ETF, said: “It is likely that in the rest of 2022 we are going to continue to see some of these companies face pressure – rising rates will create challenges for businesses on the lending side and [buy now pay later] especially.”
However, he added that “despite the heightened risks in the market, we have only been down about $40 million in net outflows since the start of the year. . . it really shows that investors continue to have a lot of faith in this sector over the long term”.
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