What happened
Shares of several fintech and digital banking stocks got relief today, as tech stocks rallied after what has been an extremely difficult month of trading. The Nasdaq Composite index closed the final day of trading this month 3.4% higher, but still finished the month of January about 10% down.
Shares of the Brazilian fintech Nu Holdings (NU) rose nearly 10% today, while shares of the fintech banks SoFi (SOFI 0.77%) and LendingClub (LC 4.07%) rose more than 12% and 11%, respectively. Nothing specific seemed to be driving the move other than the broader market rally.
So what
Tech and fintech stocks have been taking a beating since November when the Federal Reserve significantly changed its outlook on how it viewed inflation and the economy.
The agency has now indicated that it will likely end the additional bond purchases it started making at the beginning of the pandemic by March, at which time it will also likely begin raising its benchmark overnight lending rate, which is known as the federal funds rate. The Fed has also indicated that it may look to shrink its balance sheet after it starts raising rates, which means it would effectively remove liquidity from the economy.
Image source: Getty Images.
The new outlook is a very abrupt change from what it was six months ago, when investors and analysts didn't think the Fed would raise rates until the end of 2022 or early 2023. At the start of 2021, many would have said the Fed might not raise rates until 2024. The new outlook resulted in investors rotating out of tech and fintech stocks. Earlier this month, Atlantic analyst Simon Clinch wrote in a research note of "hostility toward growth stock multiples."
The digital marketplace bank LendingClub recently reported earnings results and revenue numbers for the fourth quarter of 2021 that beat analyst estimates. But management also guided for lower earnings and more modest origination growth than analysts had been expecting this year, and the stock was crushed, falling more than 30% the day after the company reported earnings.
Investors seem to be worried that LendingClub's results may indicate that the growth party is over for some of these fintech companies. Still, LendingClub is projecting revenue growth of more than 40% this year and for earnings to rise more than sixfold in 2022. The problem is that the results do not suggest nearly as much growth when you annualize third- and fourth-quarter earnings numbers.
Now what
Since it's trading at less than 13 times projected 2022 earnings, I believe LendingClub has been oversold. Because the company holds a portion of its high-yielding loan originations on its balance sheet, I believe it can still perform well even if it doesn't grow originations by a huge amount each year.
For other highly valued fintech companies such as SoFi and Nu, I am still unsure whether they have seen a bottom. SoFi still has a market cap of close to $10 billion, while Nu still has a market cap of nearly $34 billion. Neither one is profitable yet. The good news is that they look much more attractive on a price-to-revenue basis than they did in the past.
But I still have concerns that the market may not be so nice if earnings results or 2022 guidance comes out lower than anticipated, so I would tread carefully. While the market may look oversold, it's still unclear right now exactly what the Fed will do this year and how the market might react.
