Fintech stocks underperformed fin or tech in 2022

Fintech companies, long hyped for their vision of bringing Silicon Valley-style innovation to the lending, investing and payments businesses, underperformed both financials and tech stocks more broadly in 2022. A vulnerability to higher interest rates, the disappearance of many pandemic-era Catalysts and a more general math for companies that followed growth-at-any-cost playbooks helped many fintech firms fall from grace.

The Global X Fintech ETF fell 52% in 2022. That’s much worse than the 12% decline in the Financial Select Sector SPDR Fund, which tracks the financial sector of the S&P 500, and the 33% decline in the Nasdaq Composite Index.

Other fintech-focused funds and indices performed even worse. Fund manager Cathie Wood’s ARK Fintech Innovation ETF, whose top holdings include Shopify Inc., Block Inc. and Coinbase Global Inc., fell 65% in 2022. The F-Prime Fintech Index, which aims to “track the performance of disruptive fintech companies , ” is down 71% through the end of December. Six of the 60 companies in the index — Affirm Holdings Inc.; Dave Inc.; Doma Holdings Inc.; Opendoor Technologies Inc.; Root Inc. and Upstart Holdings Inc. — fell more than 90 % in 2022.

All sorts of high-growth tech stocks sold off in 2022 after the Federal Reserve began raising interest rates to fight inflation. Higher interest rates give investors more options for where to put their money for consistent returns, making them less willing to take a risk on technology stocks that promise growth.

But higher prices posed an additional challenge for balance sheet-heavy fintech companies. Lenders Affirm and Upstart rely on banks and money managers to fund the loans they make to borrowers. Non-traditional consumer lenders are now paying more to borrow money, squeezing their margins and even putting some smaller players out of business.

Many fintech companies also mistook the cyclical increases they enjoyed during the pandemic for permanent shifts. PayPal Holdings Inc. and Shopify wrongly bet that the increased online shopping volumes they had in 2020 and 2021 would last, forcing them to cut spending when in-store shopping returned the following year. Robinhood Markets Inc. hired more than a thousand additional employees in 2021 to keep up with trading volumes it expected to remain high, only to have to lay off many of them as investor interest waned.

Many of the once high-flying fintech upstarts are also losing money, which no longer sits well with investors.

“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 commentary,” wrote Eugene Simuni, an analyst at MoffettNathanson who covers fintech , in a December research note.

Mr. Simuni said only one high-growth fintech company he follows has been consistently profitable, Shift4 Payments Inc.

The company, which processes payments for businesses and merchants, fell just 3% in 2022.

Write to Peter Rudegeair at [email protected]

BY PETER RUDEGEAIR | UPDATED 03 JAN 2023 08:00 EST

Higher interest rates and unprofitable business models weigh on the sector

The banks of the future have a tough present.

Fintech companies, long hyped for their vision of bringing Silicon Valley-style innovation to the lending, investing and payments businesses, underperformed both financials and tech stocks more broadly in 2022. A vulnerability to higher interest rates, the disappearance of many pandemic-era Catalysts and a more general accounting for companies that followed growth-at-any-cost playbooks helped many fintech firms fall from grace.

The Global X Fintech ETF fell 52% in 2022. That’s much worse than the 12% decline in the Financial Select Sector SPDR Fund, which tracks the financial sector of the S&P 500, and the 33% decline in the Nasdaq Composite Index.

Other fintech-focused funds and indices performed even worse. Fund manager Cathie Wood’s ARK Fintech Innovation ETF, whose top holdings include Shopify Inc., Block Inc. and Coinbase Global Inc., fell 65% in 2022. The F-Prime Fintech Index, which aims to “track the performance of disruptive fintech companies , ” is down 71% through the end of December. Six of the 60 companies in the index — Affirm Holdings Inc.; Dave Inc.; Doma Holdings Inc.; Opendoor Technologies Inc.; Root Inc. and Upstart Holdings Inc. — fell more than 90 % in 2022.

All sorts of high-growth tech stocks sold off in 2022 after the Federal Reserve began raising interest rates to fight inflation. Higher interest rates give investors more options for where to put their money for consistent returns, making them less willing to take a risk on technology stocks that promise growth.

But higher prices posed an additional challenge for balance sheet-heavy fintech companies. Lenders Affirm and Upstart rely on banks and money managers to fund the loans they make to borrowers. Non-traditional consumer lenders are now paying more to borrow money, squeezing their margins and even putting some smaller players out of business.

Many fintech companies also mistook the cyclical increases they enjoyed during the pandemic for permanent shifts. PayPal Holdings Inc. and Shopify wrongly bet that the increased online shopping volumes they had in 2020 and 2021 would last, forcing them to cut spending when in-store shopping returned the following year. Robinhood Markets Inc. hired more than a thousand additional employees in 2021 to keep up with trading volumes it expected to remain high, only to have to lay off many of them as investor interest waned.

Many of the once high-flying fintech upstarts are also losing money, which no longer sits well with investors.

“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 commentary,” wrote Eugene Simuni, an analyst at MoffettNathanson who covers fintech , in a December research note.

Mr. Simuni said only one high-growth fintech company he follows has been consistently profitable, Shift4 Payments Inc.

The company, which processes payments for businesses and merchants, fell just 3% in 2022.