End of PayPal dominance increases appeal of Fintech ETFs

by James · February 13, 2023

Early 2023 is a different time for the fintech sector.

Gone are the days at the top of the growth bubble, in 2021, when there were few areas hotter than fintech. Venture capital funds invested an astounding $132 billion in fintech startups globally during 2021, according to Dealroom.cotheir data.

Digital wallets, buy now, pay later offers, one click payment models and crypto trading were all the buzzing fintech trends that captured the imagination of investors. Even as the growth bubble popped in 2022, VCs invested another $85 billion in the space last year.

In the public markets, the excitement over fintech was also palpable. PayPal nearly quadrupled from its March 2020 low to its 2021 peak, taking its market cap to $360 billion. Another fintech darling, Block (formerly Square), rose sevenfold in the same period, topping $100 billion in market capitalization at its peak.

In 2023, investors don’t care about buzzwords – or even growth. They care about profit. This is why activist investor Elliott Investment Management invested $2 billion in PayPal in 2022, pushing the company to cut costs and focus more on profitability.

The moves worked, and the company recently projected a record $4.87 in non-GAAP earnings per share this year, more than making up for last year’s 6% decline.

Still, despite PayPal’s growing focus on profits, investors aren’t embracing the stock the way they once did. Shares remain 75% below peak levels and are currently trading below market value.

The recent announcement that the company’s CEO Dan Schulman will retire at the end of the year has added to the uncertainty surrounding the company.

Competition

Investors are also concerned about competition in the fintech space.

All the money that has flowed into fintech startups in recent years has spawned dozens of PayPal rivals, while the firm also faces competition from tech giants like Apple that have their own fintech ambitions.

It’s a reminder that moats, or durable competitive advantages, usually don’t last long in the tech space.

PayPal was one of the exceptions. Founded over two decades ago, PayPal was the preeminent fintech company at the time. The ubiquitous checkout button powered online shopping for years.

But the company’s dominance is under threat: From Apple Pay to Afterpay to Shop Pay and more, the number of payment buttons has multiplied, and PayPal is just one of many.

Digital wallets are also numerous, as are the back-end payment processing capabilities that PayPal provides to app developers through Braintree.

Diversification

All of this makes investing in a single fintech stock, even one as iconic as PayPal, a risky proposition. Enter fintech ETFs.

The ARK Fintech Innovation ETF (ARKF)it Global X Fintech ETF (FINX) and Grayscale Future of Finance ETF (GFOF) holding baskets of stocks within the broader fintech space in which PayPal operates.

It’s a safer way to invest in the fintech growth theme while avoiding individual stock risk.

Ironically, ARKF currently does not own PayPal. Instead, it’s opting for investments in stocks like Shopify, Coinbase, Block — and, confusingly, cloud communications software provider Twilio, which just announced layoffs of 17% of its workforce

Meanwhile, PayPal is the third largest holding in FINX, with a weight of 6.6%. Others include Fiserv, Block, Inuit and Adyen.

GFOF is the most distinct of the three ETFs, with a goal of investing in companies operating in the “digital asset ecosystem,” or in other words, crypto.

PayPal is the third largest holding in the ETF’s portfolio, with a weight of 7.2%, behind Block’s 7.4%. Both companies offer their customers the ability to buy and sell cryptocurrencies through their apps.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2