What happened
Shares of Upstart (UPST 2.76%), Block (SQ 2.32%), and Lemonade (LMND 1.64%) were down big again on Monday, down 10.7%, 7%, and 8.1%, respectively on the day.
While each of these companies is slightly different in what they do -- Upstart uses artificial intelligence to underwrite consumer loans, Block is a payments processor, lender, and consumer broker and digital wallet, and Lemonade is a digital insurance brokerage -- each is a type of high-growth fintech stock.
Fintechs benefited over the past few years as the interest rate environment was amenable to high-growth technology stocks, and the economy was relatively healthy. However, the current environment is causing concerns that both those trends might reverse.
So what
There wasn't any material news out of any of these companies today. However, with oil prices and geopolitical tensions remaining high, there's a lot of uncertainty over the economy. Investors are also concerned about inflation; tomorrow, the markets will receive producer price index readings from February. And on Wednesday, there is a Federal Reserve meeting in which officials will likely raise interest rates for the first time since the start of the pandemic.
What may have really driven these stocks lower today is the 10-year Treasury Bond yield rocketing 6.8% higher to 2.14%, the highest reading since 2019, and now even higher than in the months prior to the pandemic. That could signal that inflation metrics are becoming more embedded. High inflation tends to lead to higher interest rates, which decrease the value of earnings far out into the future.
That hurts the value of growth stocks like Upstart, Block, and Lemonade. Upstart trades at 62 times earnings, Block trades at 287 times earnings, and Lemonade is still unprofitable. Therefore, it's no surprise they got hurt along with other high-growth tech stocks today.
The market is currently treating these companies more like tech stocks and less like financials or banks, which were trading higher today. Still, that high inflation rate could also cause economic growth to slow, or even a recession. The uncertainty is leading investors to ask if, perhaps, Upstart's underwritten loans will see more charge-offs, or if Block's loans to merchants will suffer as businesses deal with higher energy and labor costs.
Image source: Getty Images.
Now what
Obviously, the market's moves don't have to do much with each company's recent results. Block and Upstart each had very solid earnings reports that beat analysts' revenue expectations, while Lemonade suffered from a disappointing outlook and higher loss ratios on newer lines of insurance.
Still, as long as the threat of stagflation -- a combination of high interest rates and low economic growth -- remains, fintech stocks that benefited from low rates and good growth over the past few years will continue to struggle. On the other hand, if the Fed can get inflation to come down without dipping the U.S. economy into recession -- what market participants call a "soft landing" -- these stocks could soar again. But the market won't know that for a while, since the Fed is just about to start raising rates.
In the end, high-quality stocks with long runways for growth should do well, and today's discounted prices could be a good long-term opportunity, with an emphasis on the words "long-term." However, the last few years have seen a speculative frenzy in these types of high-growth stocks. So, investors should really drill down on these companies' future profit potential, and not just profit-less revenue growth.
With higher interest rates and global uncertainty, investors are focused on intrinsic value, so investors should have a realistic view of these companies' future cash flows before investing. Don't just buy because these stocks are down so much. As we've seen, things can always fall further, and these companies don't have current profitability to fall back on.
