Half a trillion dollars wiped out by once high-flying fintechs
Fears that digital businesses, which thrived during lockdown, may not weather a recession have hit them
Nearly half a trillion dollars has disappeared from the valuations of once-high-flying financial technology companies that benefited from the boom in IPOs early in the pandemic.
According to data from CB Insights, more than 30 fintech companies have gone public in the U.S. since the beginning of 2020 as investors flocked to the companies they believed could benefit from a long-term shift to digital. accelerated by the pandemic.
However, these companies are the hardest hit by the sell-off this year amid concerns about rising interest rates, a lack of profits and untested business models as the economy heads towards a potential recession.
According to an analysis by the Financial Times, shares of recently listed fintech companies have fallen an average of more than 50 percent year-to-date, compared with a 29 percent decline for the Nasdaq Composite. Their cumulative market cap is down $156 billion in 2022. Each stock is down around $460 billion from its all-time high.
A second-quarter report from online lender Upstart last week is an example of the challenges many fintechs face. The company, which says it uses artificial intelligence to make consumer lending decisions, blamed the "stormy economy" for slowing sales growth and mounting losses.
This was compounded by comparison to an exceptionally strong result in the same quarter last year, when the contrast to the economic dislocation led to more than 1,000 percent annual sales growth in 2020.
Pressure has also hit more established companies like PayPal and Block -- formerly known as Square -- which have collectively lost nearly $300 billion in market cap this year.
The fall in valuations in the public markets has also impacted private companies. Klarna lowered its price tag from $46 billion to under $7 billion in a private funding round earlier this month, and the Wall Street Journal reported this week that Stripe cut its internal valuation by more than a quarter.
Dan Dolev, an analyst at Mizuho, said that fintechs - digital payments companies in particular - were "the first part of the tech sector to benefit greatly from Covid, with everyone stuck at home and shopping online".
"Now they are overcorrecting lower ahead of other sectors."
Dolev said he expects many companies to bounce back in the second half of the year as comparisons to previous years become more flattering.
Some companies are also under additional pressure from regulators. The Securities and Exchange Commission is scrutinizing perceived conflicts of interest arising from "payment for flow of orders," online broker Robinhood's main source of revenue, and SEC Chairman Gary Gensler has called for clearer oversight of cryptocurrency markets. The Consumer Financial Protection Bureau also launched an investigation into "buy now, pay later" companies in December last year.
Traditional financial services results have also been impacted. Wells Fargo on Friday blamed a $576 million writedown on its investment portfolio for missing analysts' revenue expectations. Wells Fargo Strategic Capital was one of the largest investors in fintechs over the past year, according to CB Insights.
Despite the numerous challenges, many investors continue to bet on the sector. Cathie Wood's ARK Fintech Innovation ETF, one of the most popular funds for the sector, is down 62 percent this year, but net outflows were less than $90 million compared to $2.7 billion in inflows negligible in the two previous years. After a sharp drop earlier in the year, investors have gained $31 million net since early June.
Pedro Palandrani, research director at Global X, which manages another fintech-focused ETF, said: "It's likely that some of these companies will continue to be under pressure for the remainder of 2022 - rising interest rates will be a major concern for companies on the credit side and particularly for... [buy now pay later] pose a challenge."
However, he added that "despite heightened risks in the market, we have only seen net outflows of about $40 million year to date...showing that investors continue to have strong belief in this sector over the long term."