Struggling Fintechs: When will the market recover?

By Dmytro Spilka
Dmytro Spilka examines the economic instability in the fintech market, and assesses the recent downturn and its longevity

Beware the bears. As the S&P 500 officially enters a bear market following a 21% decline in its opening 2022 prices, investors are fearing more widespread declines throughout a fintech industry that generated so much optimism throughout the prosperous opening months of 2021. 

So how did the bear market take hold on Wall Street? There are many factors that have combined to spook investors, primarily surrounding the rise of record-breaking inflation rates, growing interest rates, the volatility caused by the war in Ukraine, and the perpetual fear that a recession is just around the corner. 

As markets struggle to overcome their many mitigating factors, investors are fearful that the Federal Reserve may have to ramp up its measures to curb inflation rates to levels that hadn’t been anticipated. Recently, Fed policymakers mulled the notion of introducing a 75-basis-point rate as a more aggressive controlling measure.  

According to data, the current state of the market is likely to spark mixed reactions from investors. Whilst the rate of decline at current levels isn’t as deep as in previous bear markets, we can see that historically speaking, the rate of recovery can take many years. 

There’s also little conviction as to just how deep the bear market will go. Maxim Manturov, head of investment advice at Freedom Finance Europe, notes that it’s important to consider that, in the case of fintech, many tech stocks had been experiencing a bubble caused by the rapid acceleration of digital transformation in the wake of the Covid-19 pandemic. With this in mind, Manturov drew comparisons with the late 1990s/early 2000s dot-com boom and subsequent crashes. 

“According to a set of corporate multiples, the deviation of US companies in December 2021 relative to the peak of the 2001 bubble was on average 28% (e.g. on P/S of around 40% and on capitalisation to GDP of 45%). There is now a slight normalization (20% fall from the peak), but relative to the 2001 bubble, the situation has deteriorated in the medium to long term - negative rates in real terms, unlimited issuance,” Manturov explained.

“Based on the energy price surges, supply issues increasing employee wage demand, the Fed balance sheet compression and rising rates, taxes and transaction costs (energy, payrolls), cause uncertainty and risk appetite declines sharply. With an earnings base of 2021, a market compression by half, that's already 2400 on the S&P500. So there is a good chance that the stock market, including stocks of technology companies, will continue its decline.”

Bears take hold of fintech and tech markets alike

One prospective issue facing both fintech and tech industries alike revolves around liquidity problems. If companies haven’t budgeted to survive periods of lower revenues then it could be severely damaging to experience a prolonged bear market. 

Whilst cash-rich companies like Alphabet, Meta, and Apple are likely to stand firm in the face of reduced revenue levels, other certified FAANG firms like Netflix have struggled significantly in the face of the crisis. 

Having lost $3.3bn in 2021 whilst regularly issuing bonds to boost capital, Netflix had 20-times more debt than equity and an annual loss of $144 million as of January 31st. At the time of writing, Netflix’s (NASDAQ: NFLX) stock is some 71% lower than its price at the beginning of 2022. 

Worryingly, this liquidity crisis could spread to riskier stocks, such as the range of fintechs that opted to embrace a cryptocurrency landscape that’s struggled to find any kind of momentum in the year so far. 

"Less profitable firms or highly risky companies are at risk the most," said Patrick Moorhead, Moor Insights & Strategy president in an email interview with Protocol. "Investors are looking to reduce risk and will exit those first."

Evidence of the struggles of Block (NYSE: SQ), an NYSE-listed stock exposed to crypto and blockchain alike, have been laid bare in 2022 as the stock fell some 65% in the year to date. 

Liquidity crises have been hitting the cryptocurrency market with alarming frequency of late, with Celsius recently halting withdrawals on its platform. Elsewhere, Nasdaq-listed crypto exchange, Coinbase, announced that 1,100 jobs were to be cut in the wake of the wider market downturn. 

With more fintech institutions seeking to adopt cryptocurrency as part of their services, this exposure during a widespread market downturn could negatively impact smaller cap endeavors in the short term. 

Short-term pain won’t affect fintech’s positive long-term outlook

Despite fintech being an industry that’s finding it difficult in the wake of a widespread market downturn, the outlook remains positive overall in the wake of the Covid-19 pandemic. 

Whilst access to funding may become more of a challenge in a bearish market, the post-pandemic landscape is likely to create new opportunities for fintech firms. For instance, as social distancing has pushed more individuals towards eCommerce and online banking, there is excellent growth potential for firms looking to build into online financial services. 

The acceleration of digital transformation caused by Covid-19 has been especially lucrative for the world of fintech. As fewer customers prioritize banking with institutions that have nearby branches, there’s plenty of room for challenger banks to ramp up their charm offensive and win custom in a way that seemed impossible for online-only fintech just three years ago. 

Whilst the short-term future for fintech may present fresh challenges for the firms that blossomed in the wake of the Covid-19 pandemic, the long-term future certainly seems likely to foster more growth among the companies that have flourished in recent years.

About the author: Dmytro Spilka is a tech and finance writer based in London. His work has been published in NasdaqKiplingerFinancial Express, and The Diplomat.


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