By Billy Duberstein
KEY POINTS
- Fintech stocks are especially sensitive to interest rates and the economy.
- With these stocks down 82% to 95%, they remain incredibly volatile to both the upside and downside.
- End-of-quarter positioning may also have something to do with big declines today.
Unprofitable fintech stocks saw excessive selling today, as the dual threats of inflation and recession loomed.
What happened
Shares of fintech stocks Upstart($Upstart Holdings, Inc.(UPST)$ ),Affirm($Affirm Holdings, Inc.(AFRM)$ ), and SoFi($SoFi Technologies Inc.(SOFI)$ )were in crash mode today, with each down.
Lately, these beaten-downfintech stockshave been among the most volatile to both the upside and the downside, and their movements are largely based on macroeconomic news.
Today happened to be a big down day in the market following yesterday's big rally, as interest rate and recession fears, along with perhaps some end-of-quarter liquidations by hedge funds, likely played a role in their synchronous decline.
So what
Stocks have been in free fall in September, especially technology growth stocks following a recent spike in long-termTreasury bond yields, and fintech stocks appear to be caught up in the selling.
Young, high-growth fintech stocks appear to be seen as a risk-on trade by investors, and investors are fleeing risk today amid so much global uncertainty. Today, U.S. jobless claims came in lower than expected, reflecting the very tight job market and potentially fueling "sticky" inflation. That could spur the Federal Reserve to continue hiking interest rates at a rapid pace.
If inflation and interest rates continue their rapid rise, higher interest rates may actually help some mature, profitable banks with low funding costs, but smaller, unprofitable fintechs will likely see their value diminish, since their profitability is still well into the future.
That's not the case with fintechs. For instance, Upstart had to resort to using its balance sheet this year to fund some of its loans. That was a departure from its initial business model of selling all loans to third-party banks and credit unions, as loan buyers balked when interest rates rose rapidly.
For its funding, Affirm relies on warehouse facilities, securitizations, and other forward-flow commitments. These are generally higher-rate options than bank deposits.
Yet even SoFi, which acquired a bank charter earlier this year that gave it access to deposits, has had to raise its deposit rate APY up to 2% as of August, up from 1.5% as recently as June, in order to attract depositors.
Basically, the smaller you are and the earlier you are in your corporate life as a financial company, the higher your funding costs will be relative to large institutions. That tends to put these companies further out on the risk curve, which opens them up to charge-offs.
Now what
With these stocks down so much from their highs, between 82% and 95%, they could have substantial upside if the economy avoids a recession and interest rates moderate. However, there is significant uncertainty on those fronts, with most economists skeptical the Fed can engineer a "soft landing."
Thus, these former highfliers remain high-risk, high-upside bets that a recession will either be avoided or that it will be shallow and mild. They remain appropriate only for investors comfortable making volatile, high-upside bets that could also yield very big losses.
Resource: the Motley Fool
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