Shares of fintech leaders Block (SQ 2.54%), Coinbase Global (COIN 7.25%), and StoneCo (STNE 5.13%) all fell on Wednesday, down 5.4%, 5.1%, and 1.8% respectively, as of 3:45 ET, as markets digested hawkish commentary from the Federal Reserve.
There wasn't any material news out of these stocks today. Sell-side research firm Piper Sandler did note that Block's cash app was the third-most used payment app among a survey of Gen Z users. However, given the declines, it was likely macroeconomic factors that affected its stock.
Each of these stocks is a high-growth fintech, and the fintech space is undergoing lots of turmoil at the moment. While each stock boomed during the coronavirus pandemic as consumers began to use more digital payments solutions, these stocks are getting hit not only on valuation concerns, with the prospect of rising interest rates, but also on a potential Fed-induced recession.
Over the past few days, several Fed officials, including Lael Brainard and Patrick Harker, came out saying the Fed will be aggressive when it comes to taming inflation, with an apparent willingness to slow growth or even induce a recession in order to tame rising prices. Also on Wednesday, the Federal Reserve released its plan to unwind its balance sheet of Treasury bonds and mortgage-backed securities.
The Fed now plans to roll off $95 billion of such securities per month, which is at the high end of expectations, and about double the rate of seen in the last tightening cycle in 2017 and 2018.
Rolling off the Fed's balance sheet could cause the 10-year Treasury bond yield to rise, and it did on Wednesday, to around 2.61%, up about 30 basis points in less than a week. Rising long-term yields can pull down the intrinsic value of high-growth stocks with much of their profits out into the future.
Currently, Block trades at 130 times this year's earnings estimates, Coinbase is expected to break even this year in terms of profitability, down from last year, and StoneCo trades at 34 times this year's earnings estimates. Although cheaper, StoneCo is in the higher-risk Brazilian economy. Basically, each company has the bulk of its value well out into the future, which is being discounted by a higher amount.
Those are high multiples, and they make these stocks subject to a valuation de-rating as rates rise. At the same time, as finance-related stocks, each stock is also sensitive to overall economic conditions. With growth set to slow, a risk-off mentality emerging, and a potential recession on the horizon, that doubly affects high-multiple fintechs.
It's a bit difficult to tell what these stocks are going to do next. Each is down massively from its highs, as you can see:
But are they buyable? I would expect these stocks to struggle in the near term as long as investors are in a risk-off mode. With soaring inflation, the Fed hiking rates, and a brutal war in Europe, each may struggle. Besides high multiples, Coinbase's link to the cryptocurrency market makes it seen as high-risk, and StoneCo's place in Brazil likely scares certain investors.
However, with an eye toward the long term, each company is an innovative, growth-oriented company looking to disrupt the financial sector. So for long-term investors who are into crypto, emerging markets in Latin America, or are passionate Gen Z users of Square, each stock may be attractive at these prices for a long-term entry. However, there could continue to be quite a bit of turmoil in the near to medium term.