What happened
Shares of high-growth fintech firms Marqeta (MQ 4.05%), Affirm (AFRM 2.49%), and Lemonade (LMND 8.23%) were rallying today, up 4.8%, 5.4%, and 8.3%, respectively, as of 3:30 p.m. EDT.
The rally in these newly public financial technology stocks wasn't so much from news out of their own businesses, but rather the stodgy old Wall Street banks they are looking to disrupt. Big bank earnings have largely come in this week better than expected, leading to optimism that the U.S. consumer is in much better shape than bears had feared.
That gives a big boost of confidence, not only to the banks that reported, but to these newer financial players that may be perceived as riskier.
So what
Each of these companies does something a bit different within the fintech space. Affirm is really the only company of the three engaged in lending, as it's a leader in the buy now, pay later space.
Marqeta is a tech platform for card issuing, which actually helps companies like Affirm seamlessly manage the intricacies of buy now, pay later, as well as a host of other fintech applications requiring real-time card monitoring and rewards. So, its revenues are tied to volumes. This means that even though it doesn't have credit risk like Affirm, Marqeta does depend on financial activity.
Meanwhile, Lemonade is a new tech-powered insurance platform that seeks to speed up the insurance application process. Its success is also about volume, while also being able to underwrite insurance properly.
These companies appear to be responding to the solid earnings coming from Wall Street banks this week, particularly consumer-facing banks such as Bank of America and JPMorgan Chase, as well as others. For instance, Bank of America reported solid consumer spending, along with still historically low charge offs that remain well below pre-pandemic levels.
Investors who had been fearing more consumer stress from rapidly rising interest rates and inflation, which would certainly affect these three stocks, may be breathing a sigh of relief. However, it appears the strong labor market and pent-up savings from the pandemic has created a strong-enough consumer to weather these difficulties -- at least thus far.
Now what
For those looking for higher-risk but high-upside bets coming out of this downturn, it's possible the fintech sector could be a good place to look. Many fintech stocks are down 70% to 90%, as they faced the double whammy of higher interest rates, which tend to hurt unprofitable growth stocks disproportionately, while also facing the threat of a recession, which could hurt any financial stock vulnerable to higher consumer charge offs. Large Wall Street banks really only faced the latter threat, so they aren't down quite as much.
So while still a risky bet, especially for investors near retirement, the fintech space is a sector in which investors who have more years to go may find some potential longer-term bargains. However, as these companies are relatively new to public markets, they still have a lot to prove, and some may not make it through this downturn without serious problems.
For those that do, however, and eventually prove themselves, there are a lot of potential upsides. So growth-oriented investors should look into this space for gems that may have been tossed out with the sector a bit too hastily.
