Investors lose sweet tooth for Fintech stocks as risk mounts

Fintech stocks took a tumble on Tuesday even as the market finished at a record high amid low liquidity. PayPal (PYPL:NASDAQ), Robinhood Markets Inc (HOOD:NASDAQ), and Block Inc. (NASDAQ:SQ) all finished negative, as the bearish weight fintech stocks continue to gain traction. Shares of PayPal lost 0.91%, while Block -2.21% and. Robinhood lost 2.21% and -3.15% respectively.

Stocks have been buffeted by the spread of the Omicron variant in recent weeks as governments around the world have imposed restrictions to try to curb coronavirus infections. Going by last year’s trend, one would have expected investors to be bullish on stocks in this sector. However, the decline in these stocks indicates that investors are looking beyond the omicron variant, especially as new data is showing the variant to be less severe than others.

During coronavirus lockdowns, people embraced digital apps that let them transfer money, pay for online purchases, receive stimulus checks, and trade stocks. This morphed into an astronomic rise in the share price of tech-related companies, which were among the biggest gainers in 2020. PayPal gained 110%, while Block Inc (formerly Square) skyrocketed by 248%.

However, as normalcy is being restored, investors seem to have lost their sweet tooth for these stocks. Shares in Block are down 35% over the past three months and down 23% since the start of 2021. PayPal’s stock has fallen 30% over the past three months and 18% since the beginning of the year. Robinhood, after skyrocketing in the private market in 2020, now trades at less than half its July initial public offering price.

Upstart Holdings Inc. (UPST:NASDAQ) is perhaps the perfect exemplification of investors dimming interest in the sector given the whiplash the stock has experienced. Shares of the online provider of unsecured personal loans rose nearly 10-fold through mid-October. The bullish premise on the stock was predicated on the assumption that Americans are beginning to borrow again, coupled with government-aid programs which helped keep defaults low.

As a result, Upstart’s shares outperformed the broader market, becoming the best-performing big company listed on the Nasdaq exchange. However, since closing at an all-time high of $390 in October, Upstart’s shares have fallen nearly 60% to $160, though the stock is still up almost fourfold this year

Upstart executives informed analysts during the last earnings call in November that consumer behavior was beginning to resemble pre-pandemic patterns, which they expected would eventually result in higher default rates. As expected, this accelerated the sell-off in the stock.

This bearish outlook on fintech stocks is further exacerbated by the Fed’s interest rate hikes which would be coming in 2022. The central bank has stated that it would increase rates at least three times in the coming year. The hawkish monetary policy adds to the waning sentiment on fintech stocks which are high-growth stocks as their valuations are based on future earnings.

Secondly, higher rates also make it easier for investors to find places to park their money for profit, which makes them less willing to put their money into riskier wagers like growth stocks. Given this, there is serious doubt that fintech stocks would find their way into investors’ good books in the coming year.

The recent move in the sector shows that investors are returning to value and fundamentals to make investment decisions going forward. The market is beginning to get impatient with stocks whose valuations are not backed by profit, high revenues, and other strong fundamental metrics.

This bearish trend has also been witnessed in SPACs, and in some of the companies that had blockbuster IPOs this year. Coinbase (COIN:NASDAQ), and Bumble (BMBL:NASDAQ) have lost 26% and 54% respectively, while shares of Affrim Holdings Inc. (AFRM:NASDAQ) have been flat for the year. Tesla (TSLA:NASDAQ) competitor, Rivian Automotive (RIVN:NASDAQ) has a lost 18% in the past month.

As such, though there may be a silver lining for fintech stocks, at least in the future, not many investors are sticking around for it to happen.