Why Fintech stocks Marqeta, Affirm and LendingClub are tearing higher today

What happened

Shares in fintech stocks Market (MQ 12.66%), Confirm (AFRM 21.32%) and LendingClub (LC 14.08%) were collectively big on Thursday, up a whopping 17.5%, 22.1% and 13.8% as of 10:44 a.m. EDT, respectively.

It wasn’t hard to figure out why: Today’s inflation report came in cooler than expected, a welcome change from the warmer-than-expected prints we’ve been used to seeing this year. Lower inflation numbers could mean the Fed will slow or even halt its aggressive rate hikes, which have wreaked havoc on financial markets and especially newer and smaller financial stocks like these three.

In addition, Marqeta reported its third-quarter results last night, delivering better-than-expected revenue results and even better-than-expected revenue guidance. Both Affirm and LendingClub had already reported third quarter earnings; while their reported quarters were quite solid, conservative forward guidance had led to a sell-off to rock-bottom prices, so it’s no surprise to see them galloping higher on the good inflation news as well.

So what

The morning consumer price index (CPI) came in at 7.7% year-on-year and 0.4% month-on-month, which was lower than the expected 7.9% and 0.5%. Perhaps more importantly, “core” CPI, which strips out volatile food and fuel prices, came in at just 6.3% year-on-year and 0.3% month-on-month, lower than expectations of 6.5% and 0.5%.

Why is inflation data so important? Because the Federal Reserve is reacting to data, and it has been frantically trying to put a lid on inflation all year, with a series of aggressive 75 basis point hikes over the past four Fed meetings. The longer inflation stayed hot, the longer and higher the Fed is likely to go. And the longer and higher interest rates go, the greater the likelihood of overshooting, thus throwing the economy into a recession.

But if inflation cools, as it appears to do today, the Fed could slow or even stop its interest rate hikes, increasing the chances of a “soft landing” or just a mild decline.

Fintech stocks have been particularly hard hit by the rapid interest rate hikes, as rapid interest rate hikes are the worst of all worlds for these names. Higher prices lower the value of future earnings, hurting virtually all growth stocks with little or no earnings.

Second, unlike some recurring software stocks or utility stocks, for example, fintech is also financially sensitive, especially companies like Affirm and LendingClub that take credit risk.

Finally, fintechs often have higher funding costs than large money center banks, and rapidly rising interest rates can put them at a competitive disadvantage for high-quality borrowers, as they tend to have a higher hurdle rate on their loans.

That’s why the sector has been so disastrously bad this year – and that’s why it’s growing today.

In addition, Marqeta reported solid third quarter results last night. Revenue rose nearly 46% in the third quarter, ahead of expectations; while loss per share missed expectations by a krone, it was due to a unique one-off cost, according to management, and Marqeta continues to invest heavily in both product and geographic expansion.

Meanwhile, the company’s forward guidance, while projecting a slowdown to between 29% and 31% in the fourth quarter, was well ahead of analysts’ expectations of just 22.9% growth.

Marqeta is actually a unique stock in that it is relatively new to the public markets and a non-profit growth stock, but it also has the balance sheet and low cash consumption to buy back its own shares while investing in the business. That makes it a name to watch among depressed fintech stocks, as Marqeta may be able to reduce most of its dilution from stock-based compensation, which is a big expense for many young growth stocks.

Marqeta doesn’t take credit risk itself, but its API platform is the technology backbone for many other fintechs and even traditional financial companies, so the stock had been hammered along with riskier fintech companies. But on the conference call with analysts, management pointed out that while new and smaller clients in the crypto and fintech world had slowed as expected, larger clients actually outgrew expectations as they appeared to benefit from their size and strength relative to smaller . competitors. Therefore, revenues were greater than expectations, even in a slowing economy.

So what

If inflation cools and the Fed is able to ease rate hikes faster than expected, leading to a “soft landing” or at least a shallower than expected recession, I think fintech stocks could have some of the biggest gains, as they has sold out among most of any subsector.

At least for one day, that seems to be the case. However, investors should be aware that today’s CPI report was for just one month, and future reports may disappoint. Furthermore, if we do indeed experience a significant recession, fintech stocks could again decline significantly.

Therefore, interested investors should dig into their favorite fintech companies, but perhaps keep this type of stock at a reasonable allocation.