Digital entities that thrive during lockdowns are hampered by recession fears
Financial technology companies have lost about half a trillion dollars in their valuations, which until recently had soared as they benefited from the boom in initial public offerings at the start of the Covid-19 epidemic.
CB Insights data points to the listing of more than 30 financial technology companies in the United States since the start of 2020, as investors embraced companies they believed could benefit from a long-term shift to digitization, and the pandemic helped to accelerate this shift According to the British newspaper “Financial Times”.
However, concerns about high interest rates, lack of profits, untested business models as well as the economy heading into a possible recession have put these companies on the cusp of a massive stock market selloff this year.
Shares in recently listed financial technology companies have fallen an average of more than 50% since the start of the year, compared with a 29% drop in the Nasdaq Composite Index, according to Financial Times analysis.
The combined market value of these companies also fell by $156 billion in 2022.
And if each stock is measured from its all-time high, the total loss is $460 billion.
The latest Q2 update from online lending company Upstart shows the challenges many fintech companies face.
Upstart, which says it uses artificial intelligence to make decisions about consumer loans, blamed a “turbulent economy” for slowing revenue growth and mounting losses.
The losses are compounded when compared to results for the same quarter last year that were unusually strong, when economic stagnation in 2020 led to annual revenue growth of more than 1,000%.
Pressure has also hit more established companies like PayPal and Block — formerly known as Square — which have collectively lost nearly $300 billion in market value this year.
The decline in valuations was not limited to the public market, but also shifted to private companies, as “Klarna” reduced its market value from $46 billion to less than $7 billion in a special round of financing at the beginning of this July , and “Strip” saw its internal valuation cut by more than a quarter.
Dan Dolev, an analyst at Mizuho, said that financial technology companies, especially digital payments companies, “are the first part of the technology sector to benefit greatly from the Covid epidemic because everyone was stuck at home, which spurred them have to buy online.”
He added, “Now it is witnessing an excessive correction to the downside before other sectors as well.”
Many companies are expected to post a recovery in the second half, especially as year-on-year comparison results are now better.
Some companies also face additional pressure from regulators.
In this regard, the Securities and Exchange Commission is conducting a review of a perceived conflict of interest arising from “pay for order flow,” the main source of income for online broker Robinhood.
Gary Gensler, the chairman of the Securities and Exchange Commission, called for clearer oversight of the cryptocurrency markets.
For its part, the Consumer Financial Protection Bureau last December launched an investigation into companies based on the “buy now, pay later” system.
The results of companies that provide traditional financial services were also affected.
Wells Fargo recently attributed the $576 million write-down in its investment portfolio to failure to meet analysts’ expectations for returns.
Wells Fargo Strategic Capital was one of the largest investors in financial technology last year, according to CB Insights.
Despite this series of challenges, many investors still support the sector, the ARK Fintech Innovation EFT Fund, from Cathy Wood, fell 62% this year, but net outflows were less than 90 percent. Millions of dollars, down from $2.7 billion in inflows. over the past two years, investors have added 31 million dollars net since the beginning of June after a sharp decline at the beginning of the year.
“It is likely that a number of these companies will continue to face some pressure until the end of 2022, as higher interest rates will create challenges for companies on the lending side, especially strategically based companies,” says Pedro Palandrani, director of research at Global X. Buy now, pay later.
He added: “Despite the heightened risks in the market, net outflows have so far only decreased by around $40 million since the start of the year, showing that long-term investors still have a lot of faith in this sector.”