Fintech stocks are lagging the rest of the market — should you buy or sell?
|
Important takeaways
- Fintech stocks have underperformed financial and technology companies over the past year as spending habits change due to inflationary pressures.
- As the pandemic-related e-commerce boost wears off, reality is setting in for many of these companies.
- Although the fintech space was shut down in 2022, some companies in this space may turn their business around in 2023.
It is almost impossible to read about the stock market in 2022 without seeing how much some of the largest public companies have fallen in value. Tech giants such as Apple and Microsoft have seen their stock prices plummet while soaring inflation and aggressive interest rate hikes have fueled concerns of a potential recession. Despite the terrible results in the tech space, the fintech space has managed to have a worse year.
Fintech companies became popular because they brought innovation to the classic business models of lending, investing and payment processing. However, fintech stocks have underperformed both financial stocks and tech giants.
What Happened to Fintech Stocks?
Before looking at fintech stocks, we need to address the concept of fintech, which combines finance and technology. This general term often refers to any business that focuses on applying new technology to a financial business. The business services in this area include payment processing, online banking, mobile banking, peer-to-peer lending, financial software, financial services and investment services.
As the world continues to go cashless and with many people relying on simpler payment methods, we have seen the number of fintech companies rise in recent years.
Some of these companies were so focused on growth that they were not concerned about profitability or felt that the pandemic boom would last longer. With share prices falling with the stock market sell-off through 2022, fintech stocks have had a terrible year.
Eugene Simuni, a fintech analyst from MoffettNathanson, made the following observation about fintech stocks:
“Investors are increasingly wary of high-growth but unprofitable business models, and over the past few quarters, high-growth firms across our coverage have increasingly prioritized profitability improvement in their actions and comments.”
What Fintech stocks are worth a closer look?
Although it is naturally difficult to promote companies that have seen their share prices fall, it is important to keep things in perspective with the fintech industry as a whole. All share prices are at closing time on 4 January 2023.
PayPal Holdings Inc. (PYPL)
PayPal did well during the pandemic months when people shopped online and used the digital payment processor. As people returned to in-person shopping, PayPal saw its volume drop. The digital payments giant has also seen increased competition from Apple’s entry into the payments space. PayPal currently has 16% of the global payments market, with Apple lagging behind at 5%, but there’s no telling what the future holds.
The good news is that the Venmo app is now on Amazon’s e-commerce platform, and this should attract new business for PayPal.
PayPal shares are currently trading at $77.92 and are down approx. 58% from a year ago.
Fair Isaac Corporation (FICO)
Regardless of how you feel about credit scores, you can’t ignore the importance of a FICO score because banks and lenders still rely on this information before deciding whether to lend you money. Although this is technically not a fintech stock like any other, this established company has been a part of the financial community for a long time.
Since the FICO score is used by lenders and companies in the fintech space, we have to mention this. It is also one of the rare financial shares that shot up in value in 2022. The points business is responsible for more than half of the company’s income. Even with the rising cost of borrowing, people still apply for all types of loans.
FICO’s stock price is currently at $585.36, up more than 30% from a year ago.
Block Inc (SQ)
Block went on a bull run before 2022 and this stock gave investors generous returns. However, the company was down as much as 60% on points throughout 2022 due to declining valuations in the technology space and a lack of confidence in the company’s current management team. Despite all this, the mobile payment processor has still reported strong top-line growth on a quarterly basis. Gross profit for Square was $783 million last quarter, which was a 29% year-over-year increase.
Block was an innovator for businesses with easy credit card payment options. The Square card reader changed how small businesses could accept payments. The company then expanded its business services to include loans, online payments and payroll options. On the consumer side, Cash App has over 49 million customers who use the service monthly. The payment app had a gross profit of $774 million last quarter, which was an annual increase of 51%.
Block’s share price is currently $70.01, down 52% from a year ago.
nCino (NCNO)
This fintech company offers cloud-based technology platforms and solutions that allow financial institutions to operate better. One of the more popular solutions is a loan origination system that helps banks manage the entire loan assignment process. With major banks like Wells Fargo and Toronto-Dominion Bank using these services, there is optimism that this fintech company could sign on to larger partnerships in 2023.
Shares of nCino are currently trading at $26.50, which is down approx. 49% from a year ago.
Shift4 Payments Inc (FOUR)
This is one of the few high-growth fintech companies that has seen its share price rise while other shares have fallen sharply. The company provides integrated payment processing and technology solutions across the United States. We included this fintech stock in the list due to the improved third quarter financial results that they posted. Gross revenue increased 45% from a year ago to $547.3 million. Net income for the quarter was $46.4 million, which was up from a loss of $13.8 million in the same quarter a year ago.
Shares of FOUR are currently trading at $60.10, with a share price that is up around 7% from a year ago.
Here are some other notable fintech stocks worth tracking in 2023:
- Visa Inc. (V). When the credit card giant released its financial results for the fourth quarter. It announced a revenue jump for the fiscal year of 22% to $29.3 billion. With interest rates on the rise, Visa is in a strong position for 2023.
- SoFi Technologies Inc. (SOFI). They have expanded their product offering in recent years, but companies that focus on consumer loans have fallen sharply in the past year. There is hope that the ongoing business momentum may be enough to see through the short-term economic struggles.
- Robinhood Markets Inc. (HOOD). The stock is down about 49% from a year ago due to the usual issues and concerns surrounding the cryptocurrency space. However, this is still one of the best investment platforms for young people who want a user-friendly interface.
As always, we encourage you to do your due diligence before investing in a fintech stock because the landscape is changing faster than ever.
Should You Buy Fintech Stocks?
Each company on the aforementioned list is in a unique situation, and there’s no telling what the future may bring. But right now might not be the best time to invest your money in the fintech space as there could be further interest rate hikes.
Here are some other factors to consider before investing in fintech stocks.
A recession is not out of the question.
Recession talk remains widespread as interest rate hikes continue with the Fed making clear its goal is to cool the economy. Many analysts fear that the soft landing scenario is not possible and that we could enter a full recession in 2023.
A recession will mean that the entire economy is in a downturn, and all aspects of the economy will feel the impact. This will also damage consumer confidence, as people will not be eager to spend money when they have to worry about a potential job loss. This would hurt any business involved in lending money or processing payments.
Increased competition from established technology giants.
Financial services and payment processing companies will experience competition from Apple as we await the official launch of Apple Pay Later. This new service would be a buy now, pay later program that would be in direct competition with PayPal and other digital payment processing firms.
How should you invest?
The stock market has not been kind to fintech stocks as rising inflation continues to hurt investor confidence. This means that finding stocks to put your money into is a challenging task at best, and there are many risks associated with investing right now.
There are ways to make your portfolio more defensive and less exposed to risk. Check out Q.ai’s Inflation Kit or Precious Metals Kit and protect your investments from falling in value so you don’t have to worry about checking the market reports daily. Even better, you can activate Portfolio Protection at any time to protect your gains and reduce your losses.
The bottom line
As we’ve outlined in previous articles, 2022 was a tough year for AI stocks, technology stocks, and fintech stocks in particular. One can be optimistic about the future, but it is more important to be realistic when money is involved. If the economy can recover in 2023, there is hope that fintech stocks will bounce back. However, we cannot ignore the reality that many of these companies simply became too focused on growth during the pandemic months when spending habits changed and profitability did not keep pace.
Download Q.ai today for access to AI-powered investment strategies.
