3 of the biggest questions for Fintech stocks in 2022
It’s been a year for fintech in 2021. Many new public fintech stocks hit huge valuations before dropping back down in the last two months of the year. Overall, however, most fintech companies saw their stocks jump in 2021. In 2022, the industry faces new momentum, in large part because the economy has changed and continues to change quite rapidly. , but there is still a lot of excitement. Here are the three big questions for fintech stocks in 2022.
1. How will credit quality be maintained?
Many FinTech companies provide credit to consumers, whether it’s credit cards, loans, or Buy It Now (BNPL) products that consumers use to buy a good or service and pay for it in cash. multiple interest-free payments. But a lot of fintech companies like Reached, SoFi, and To assert did not become public until after the start of the COVID-19 pandemic. Credit conditions have been incredibly favorable because consumers have saved a lot, received stimulus payments, and the Federal Reserve and Federal Government have pumped billions of dollars into the economy.
But now things are changing. Savings rates have come down, the Fed is cutting its bond buying program, stimulus and enhanced unemployment benefits are exhausted, and Fed members have indicated there could be multiple rate hikes This year.
This could start to tire the consumer. Investors are probably keen to get a deeper look at how the credit quality of loans is holding up with new artificial intelligence and machine learning lending platforms. Many fintech lenders have made great promises. While they have kept their promises in some ways, many of their loan portfolios have not gone through a cycle of rising rates.
Specifically, BNPL will be under a microscope, as there have already been reports of a large number of users behind on payments. Although many of these companies do not have loans on their balance sheets, investors and partners may stop buying these loans if they start to deteriorate to higher rates than expected.
2. What will consumer demand be?
Whether on the spending or debt side, it will be interesting to see how consumer demand evolves in 2022. Bloomberg recently reported that consumer spending in major cities was up 15% from 2019. Due to a lack of spending in 2020 and money pumped into the system, consumers had excess savings that they were eager to spend after more than a year of lockdown indoors amid COVID lockdowns. They would take vacations when they could, go back to restaurants and bars, get married and go to concerts. I’m sure the new COVID variants will cut spending briefly, but mass immunization has brought the world much closer to normal than it was at the start of the pandemic.
Yet many industries, such as travel and accommodation, have not fully recovered. Although consumers are currently in great shape, they are not as bloated as they used to be and inflation has caused prices to skyrocket which could dampen demand. On the flip side, for mainstream fintechs, lower savings mean more lending, and credit card applications recently hit a pandemic high. Despite this, this year’s economic growth is still a question.
Not so long ago, some banks started cutting their gross domestic product (GDP) estimates for 2022. Goldman Sachs, for example, still forecasts a growth of the US economy of 3.8% in 2022, which is very strong compared to historical growth. If Goldman’s forecast comes true, the impact of inflation and higher rates might not be that bad. But with so many competing economics, demand is a key trend to watch when it comes to fintech.
3. What role will the evaluation play?
Fintechs such as Affirm and Upstart – and SoFi to a lesser extent – saw their stock prices rise last fall to reach sky-high valuations, which quickly collapsed as the economic outlook shifted. Now, there is debate as to whether these companies have been oversold, with Affirm and Upstart falling almost 43% and over 60%, respectively, since early November.
After the steep declines, Affirm is trading at around 19 times futures earnings and Upstart is trading at around 10 times futures earnings. This is much more reasonable than before, but again, it could also be in anticipation of much more difficult market conditions this year. Buying fintech stocks at cheaper valuations makes sense, but it will be interesting to see whether investors are more likely to engage in fintechs that are undervalued or with higher valuations. The other possibility is that the industry will continue to move as a group, which it has largely done in the last two months of 2021.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.