Concerns about the overvaluation of fintech stocks have been amplified by inflation and rising interest rates. With fintech and digital payments players like PayPal, Block and SoFi trading at considerable discounts, these stocks could present a buying opportunity for investors based on each company’s growth outlook.
Rising interest rates intended to combat inflation have amplified concerns about tech stocks being overvalued. This has led many investors to rotate out of growth stocks and those that are highly priced relative to earnings, which has resulted in downward pressure on fintech companies.
Since the outbreak of the war in Ukraine began on 24 February, fintech funds have fared far worse than the market as of 26 April close. The Global X Fintech ETF [FINX] and Ark Fintech Innovation ETF [ARKF] posted negative returns of 12.7% and 21% since the conflict began. In comparison, the S&P 500 has fallen by 2.8% in the same period.
As the fintech industry faces continued downward pressure, stocks such as payments giant PayPal [PYPL], digital payments firm Block [SQ] and online personal finance company SoFi Technologies [SOFI] could be undervalued.
PayPal diversifies into crypto
For the three months to the end of December, PayPal reported revenue of $6.9bn, up 13% year-over-year. It marked the third consecutive quarter of mixed earnings.
The company’s CEO Dan Schulman explained on the Q4 2021 earnings call that supply chain bottlenecks had “disproportionately affected” cross-border volumes, especially out of China. Meanwhile, “exogenous factors”, such as inflation, had dragged down consumer spending, while “rising threats from Covid variants cut travel and event bookings”.
The impact is expected to have continued into the first quarter of the year, but the company believes that new product rollouts later in the fiscal year will lead to a stronger performance in the second half.
In January, it was confirmed that the company was looking to launch its own stablecoin to help drive its cryptocurrency push and diversify its revenue base.
Bruderman Asset Management equity analyst Akshata Bailkeri told CNBC’s Fast Money earlier this month that retail sales should pick up in 2023 and PayPal will be “a primary beneficiary”.
The PayPal share price is down 26.4% in the last month to $83.70 at the close on 26 April, recording a 52-week low of $83.57 earlier in the day.
Block’s integration plans for Afterpay
Jack Dorsey’s Block has also seen slowing growth with revenue falling to a rate of 29% in the three months to the end of December. In the three months to the end of March 2021, the growth rate was 266%.
Quarterly profits were once again driven by Cash App, which generated $12.3bn in revenue in fiscal 2021 — 81% coming from Bitcoin.
The company will report its Q1 2022 earnings on 5 May. Citi analyst Peter Christiansen believes investors will be looking beyond these results “with their primary focus on the 18 May investor day, where we believe the company is likely to detail its Afterpay integration plans and perhaps lay out FY22 growth expectations”.
Although Block offers a long-term growth opportunity, its current valuation makes it a risky investment. The share price is down 23% in the last month through to the close on 26 April, but the trailing 12-month P/E ratio is an eye-watering 325.39. For comparison, PayPal’s is 24.94.
SoFi slumps amid student loan moratorium
In the early part of the pandemic, the US government paused repayments on student loans. It had been expected that this would be lifted on 1 May, but President Biden has since announced that it’ll be pushed back to 31 August.
What’s good news for graduates isn’t so great for shareholders of SoFi, whose business is refinancing educational debt. The company believes that repayments might not even restart this year and probably not before the run-up to the midterm elections in November. This would have an impact on sales and profit — the business has been operating at 50% of its pre-Covid level for the past two years.
The company said in a statement: “Even with the assumption of no end to the moratorium in 2022, our new full year 2022 financial guidance represents approximately 45% year-over-year adjusted net revenue growth to $1.47bn, a tripling of adjusted EBITDA to $100m, and a doubling of margins.”
The SoFi share price has cratered recently, falling 39% since the conflict broke out. It closed at $6.29 on 26 April, having set an all-time low of $6.14 earlier in the day.
While the stock has been caught up in the broader tailspin, its performance is indicative of the many companies that went public via SPAC mergers and are now trading well below their $10 per unit net asset value.