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The Ratings Game: Why beaten-down fintech stocks may be worth a new look, according to this analyst


Fast-growing financial technology stocks have been among the biggest losers in the market downturn, but one analyst thinks some of them might deserve a fresh look.

SMBC Nikko Securities America analyst Andrew Bauch follows a basket of high-growth fintech stocks including Block Inc.
Marqeta Inc.
and Toast Inc.
and he notes that the median name in his coverage area was off 67% since the start of November, while the S&P 500

had fallen 18% as of the publication of his research note early Thursday.

“From our perspective, it’s readily apparent the primary variable for this underperformance is attributable to one of the most profitability-focused markets we’ve seen in years,” he wrote, acknowledging that many of the companies he follows “are in highly competitive sub-segments and/or have bold disruption ambitions” and either have just recently turned profitable or have yet to do so.

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He added that he was “reluctant to make a call on the macro/rate dynamics” but thought that the sector “may be reaching the bottom on a relative basis.” He pointed to the Global X FinTech ETF
writing that on the basis of enterprise value to revenue and enterprise value to earnings before interest, taxes, depreciation, and amortization (Ebitda), the ETF’s multiple premiums relative to the S&P 500 are below pandemic lows and two standard deviations behind their three-year averages.

The Global X FinTech ETF has plunged 47.9% year to date, while the S&P 500 has lost 23.1%.

On an individual level, he sees some reason for optimism, noting that some names, such as Marqeta, Affirm Holdings Inc.
, Holdings Inc.
and Nuvei Corp.

have actually seen their 2023 gross profit estimates come up since November, all while their shares have lagged.

Bauch contrasts that with some more old-school names, including Mastercard Inc.
Global Payments Inc.
and NCR Corp.
which have seen 2023 estimate changes “below the median” while their stocks have outperformed the median name in the category. Such names “may be at greater risk to rerate lower,” he wrote.

He further expressed a skew toward stocks that could be less sensitive to cyclical trends.

“With recession on the table, the calculus for investors has once again become
more complicated,” Bauch wrote. “At this time, looking at our coverage, our preferred portfolio would be tilted toward names exposed to noncyclical/less cyclical end markets,” such as AvidXchange Holdings Inc.
,, Flywire Corp.
and Paymentus Holdings Inc.,
which he said “in a recession scenario would most likely be the last group to face economic headwinds.”

AvidXchange and make software that helps businesses automate back-office financial functions. Flywire strives to improve the process of sending international payments, while Paymentus offers tools that aim to modernize bill payments.

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