Among the 18 U.S. fintech companies that conducted traditional IPOs or direct listings since January 2020, six were trading below their IPO price as of Aug. 31, according to data compiled by S&P Global Market Intelligence. Those stumbles often reflect a disconnect between the enthusiasm of private equity and venture capital investors for fintech startups and the more measured responses of portfolio managers and traders in equities markets. For some fintechs at the early stages of the planning to go public, their excitement about listing has cooled.
"We've seen companies that were several months ago aggressively thinking about going down the IPO or [special purpose acquisition company] route, and they've put those plans on hold just given the cooling of that market," said Kegan Greene, director at Houlihan Lokey's data and analytics group.
The one-year total return of the S&P U.S. Financial Technology Index was 22.26% at Aug. 31, lagging the S&P 500's total return of 31.17% over the same period by roughly one-third.
Some newly listed fintechs, including Coinbase Global Inc., SoFi Technologies Inc., Marqeta Inc., Duck Creek Technologies Inc. and Lemonade Inc., "definitely have underperformed" compared to benchmarks, even if some of them trade above their IPO price, said Josef Schuster, founder of Chicago-based IPOX Schuster LLC, an index creator that aims to characterize the aftermarket performance of new listings. SoFi, which went public through a SPAC merger in June, has recorded a total return since its first day of negative 35.67%. SoFi did not respond to a request for comment about its stock performance.
Where does a fintech belong?
Fitting nascent fintechs into a traditional investment methodology of sector buckets creates ambiguity in practice for portfolio managers. Many fintech stocks trend downward in the public market because they pegged a valuation aligned with software companies from private investors, but the public market views them more like financial stocks, which overall trade at lower multiples, Schuster said. However, while a checking account product offered by a fintech may be no different in function from what a bank offers, the underlying economics of their business models can be distinctive. Anchoring a challenger bank's valuation against a financial institution could oversimplify the fintech's value proposition.
Schuster's company has experienced the complexity of categorizing fintechs when it compiles proprietary fintech indexes. While SoFi can be benchmarked against Charles Schwab Corp., TD Ameritrade Inc. or Morgan Stanley because of its self-directed wealth management products, it can also be put into the bucket of PayPal Holdings Inc. and Square Inc. since SoFi has elaborated its strategy to dive into payments, Schuster said.
Categorizing a fintech could also involve a comparison to technology or social media companies. Some consumer-facing fintechs, such as challenger banks, trading or credit scoring apps, closely track user growth and how actively users are engaged with their mobile applications, since their revenues come down to monetizing those relationships, just like social media companies seek to.
Moreover, investors in the public market are not necessarily convinced that fintechs can keep their competitive edges if full-service financial institutions step into their territory. When Apple Inc. and Goldman Sachs Group Inc. made headlines on July 13 regarding a potential partnership to offer buy-now, pay-later, or BNPL, products, BNPL specialist Affirm Holdings Inc.'s stock price dropped, and it fell again when Square Inc. announced it would acquire BNPL player Afterpay Ltd. The dynamic goes both ways, though: Affirm's stock jumped about 46% after it announced a partnership with Amazon.com Inc.
Some fintech companies are by nature more tied to cyclical or temporary trends. For instance, the share price of Coinbase Global Inc., which runs a cryptocurrency trading platform and wallet in the U.S., is down 32% from its IPO in April. It saw the number of its daily active users decline to about 4.2 million at the end of August from the peak of almost 9 million in May, according to data from Apptopia, which tracks mobile app usage. That drop mirrored the falling price of bitcoin between April and August.
Despite a flat or downward trend, some fintech stocks are still much more expensive than their incumbent comparables. As of Sept. 1, cloud-based banking software provider Alkami Technology Inc. traded at 17.55x total enterprise value to trailing 12 months revenue even though the stock price is 4.8% down from its IPO price, while the same valuation metric for incumbent core banking software vendor Fiserv Inc. is 6.33x.
Long-term growth
Short-term volatility or underperformance may take the shine off an IPO, but industry experts are not discounting the longer-term trends that benefit the fintech sector. Behind the soaring valuation of fintech startups lies a real demand for their technology and a quickly growing addressable market, they said.
"It's tough to judge a company's public market performance over such a short period of time," said Aalap Merchant, senior managing director at Marlin & Associates, a boutique investment bank focused on the fintech sector. "If you apply a longer-term lens, what you're seeing is across the board, fintech companies are experiencing expanding valuations." The main driver is that digitization and automation is effectively becoming a permanent fixture in financial services, Merchant said.
In a longer time period, the fintech sector has turned out to be a rewarding investment class, said Sam Kilmer, senior director at Cornerstone Advisors. Over a five-year period, the Global X FinTech ETF, a fund created by Mirae Asset to invest in cutting-edge fintech companies, has more than tripled in value, whereas the S&P 500 doubled during the same time frame, Kilmer noted. The fintech ETF is composed of 54 companies across payments, banking software, insurtech, investing, alternative lending and blockchain technology, including emerging companies such as Coinbase, Adyen NV, Square and Affirm, as well as incumbents such as Fiserv, SS&C Technologies Holdings Inc., Guidewire Software Inc. and Black Knight Inc., according to its website.
"As long as they have established clients, with established revenue contracts and they're continuing to grow, I'm generally positive on them," Kilmer said. "Because if you look at the five-year trend, it's been good."