It was quite a year for fintech in 2021. Many new public fintech stocks got driven up to huge valuations before coming back down in the last two months of the year. On the whole, though, most fintech companies saw their stocks jump in 2021. In 2022, the sector faces a new dynamic, largely because the economic picture has changed and continues to change pretty quickly, but there is still a lot of excitement. Here are the three big questions for fintech stocks in 2022.
1. How will credit quality hold up?
Many fintech companies are extending credit to consumers, whether it's credit cards, loans, or buy-now-pay-later (BNPL) products that consumers use to buy a good or service and pay for it over several interest-free payments. But a lot of fintech companies like Upstart, SoFi, and Affirm only went public after the COVID-19 pandemic began. Credit conditions have been incredibly benign because consumers have saved a lot, received stimulus payments, and the Federal Reserve and federal government have pumped trillions of dollars into the economy.
But now things are changing. Savings rates have come down, the Fed is tapering its bond-buying program, stimulus and enhanced unemployment benefits have run out, and members of the Fed have indicated there could be multiple rate hikes this year.
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This could start to strain the consumer. Investors are likely eager to get an in-depth look at how the credit quality of loans powered by new artificial intelligence and machine-learning lending platforms holds up. Many fintech lenders have promised big things. Although they have delivered in some regard, 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 big chunk of users falling behind on payments. Although many of these companies are not holding loans on their balance sheets, investors and partners may stop buying these loans if they start to go bad at higher rates than expected.
2. What will consumer demand be like?
Whether it's on the spending side or taking on debt, it will be interesting to see how consumer demand changes in 2022. Bloomberg reported recently that spending by consumers in major cities is up 15% compared to 2019. Due to a lack of spending in 2020 and money pumped into the system, consumers had excess savings that they were anxious to spend after more than a year of being stuck inside amid COVID lockdowns. They took vacations when they could, returned to restaurants and bars, had weddings, and went to concerts. I am sure the new COVID variants will put a brief dent in spending, but mass vaccination has enabled the world to get much closer to normal than earlier in the pandemic.
Still, there are many sectors, like travel and lodging, that have not recovered fully. Although consumers are currently in great shape, they are not as flush as they once were and inflation has sent prices soaring, which could stymie demand. On the flip side for consumer fintechs, lower savings leads to more lending, and credit card applications recently hit a pandemic high. Despite this, economic growth this year is still a question.
Not long ago, some banks began to cut their gross domestic product (GDP) estimates for 2022. Goldman Sachs, for example, is still projecting the U.S. economy to grow 3.8% in 2022, which is very strong compared to historic growth. If Goldman's forecast pans out, then the impact of inflation and higher rates may not be so bad. But with so many conflicting economic factors, demand is a key trend to watch in regard to fintech.
3. What role will valuation play?
Fintechs such as Affirm and Upstart -- and SoFi to a lesser extent -- saw their stock prices driven up last fall to towering valuations, which quickly came tumbling down as the economic outlook shifted. Now there's a debate over whether these companies have been oversold, with Affirm and Upstart down nearly 43% and more than 60%, respectively, since the start of November.
After the steep declines, Affirm trades at about 19 times forward revenue, and Upstart trades at about 10 times forward revenue. That's much more reasonable than it was, but again, it could also be in anticipation of much more difficult market conditions this year. Buying fintech stocks with cheaper valuations make sense, but it will be interesting to see if investors are more likely to pile into undervalued fintechs or ones with higher valuations. The other possibility is that the sector continues to move as a group, which it largely did for the last two months of 2021.
