Fintechs struggling: When will the market recover?

Watch out for the bears. As the S&P 500 officially enters a bear market after a 21% drop in opening prices in 2022, investors fear a more extensive fall. through a fintech industry which generated so much optimism through the prosperous opening months of 2021.

So how did the bear market get on Wall Street? There are many factors that have combined to scare investors, primarily around the rise in record high inflation rates, rising interest rates, the volatility caused by the war in Ukraine, and the perpetual fear that a recession is just around the corner.

While markets are struggling to overcome the many mitigating factors, investors are afraid that the Federal Reserve may have to increase its measures to curb inflation to levels that were not expected. Recently, Fed policy makers pondered the idea of ​​introducing an interest rate of 75 basis points as one more aggressively controlling measures.

According to data, the current state of the market is likely to trigger mixed reactions from investors. Although the decline at current levels is not as deep as in previous bear markets, we can see that historically the recovery rate can take many years.

There is also little conviction about how deep the bear market will go. Maxim Manturov, Head of Investment Advising at Freedom Finance Europe, notes that it is important to note that, in the case of fintech, many technology stocks had experienced a bubble caused by the rapid acceleration of digital transformation in the wake of the Covid-19 pandemic. With this in mind, Manturov made comparisons with the dot-com boom of the late 1990s / early 2000s and subsequent crashes.

“According to a set of corporate multiples, the deviation of US companies in December 2021 in relation to the peak of the 2001 bubble was on average 28% (eg on P / S of around 40% and on capitalization to GDP of 45%). It is now a small normalization (20% fall from the top), but compared to the 2001 bubble, the situation has worsened in the medium to long term – negative interest rates in real terms, unlimited issuance, “Manturov explained.

“Based on energy price increases, supply problems that increase demand for employees’ wages, compress the Fed balance sheet and increase prices, taxes and transaction costs (energy, wages), uncertainty and risk appetite fall sharply. With a revenue base of 2021, a market compression of half, “There are already 2400 on the S & P500. So there is a good chance that the stock market, including shares in technology companies, will continue to decline.”

Bjørner takes over the fintech and technology markets

A potential problem facing both the fintech and technology industries is liquidity problems. If companies have not budgeted to survive periods of lower income, it can be seriously detrimental to experience a long-term bear market.

While cash-rich companies such as Alphabet, Meta and Apple are likely to be stuck in the face of declining revenue levels, other certified FAANG companies such as Netflix have struggled significantly in the face of the crisis.

After losing $ 3.3 billion in 2021 while regularly issuing bonds to raise capital, Netflix had 20 times more debt than equity and an annual loss of $ 144 million as of January 31st. At the time of writing, Netflix stock (NASDAQ: NFLX) is around 71% lower than the price at the beginning of 2022.

Worryingly, this liquidity crisis could spread to more risky stocks, such as the range of fintechs that chose to embrace a cryptocurrency landscape who have struggled to find any kind of momentum in the year so far.

“Less profitable companies or very risky companies are most at risk,” in Patrick Moorhead, Moor Insights & Strategy President in an Email Interview with Protocol. “Investors are looking to reduce risk and will leave them first.”

Proof of the battles to Block (NYSE: SQ)a NYSE-listed stock exposed to both crypto and blockchain, was issued in 2022 when the stock fell around 65% so far this year.

Liquidity crises have hit the cryptocurrency market with alarming frequency recently, with Celsius has recently stopped withdrawals on its platform. Elsewhere, the Nasdaq-listed cryptocurrency exchange Coinbase announced it 1100 jobs were to be cut in the wake of the broader market downturn.

With several fintech institutions wishing to adopt cryptocurrency as part of their services, this exposure during a widespread market downturn could have a negative impact on smaller companies in the short term.

Short-term pain will not affect fintech’s positive long-term prospects

Despite the fact that fintech is an industry that finds it difficult in the wake of a comprehensive market downturn, the outlook remains positive in the wake of the Covid-19 pandemic.

While access to finance may be more of a challenge in a bearish market, the post-pandemic landscape is likely to create new opportunities for fintech companies. For example, since social distancing has pushed more individuals toward e-commerce and online banking, it is excellent growth potential for companies looking to embed financial services online.

The acceleration of digital transformation caused by Covid-19 has been particularly lucrative for the fintech world. As fewer customers prioritize banking services with institutions that have branches nearby, there is plenty of room for challenger banks to increase their charm offensive and win customized in a way that seemed impossible for fintech just three years ago.

While the short-term future of fintech may present new challenges for the companies that flourished in the wake of the Covid-19 pandemic, the long-term future looks set to provide more growth among the companies that have flourished in recent years.

About the author: Dmytro Spilka is a technology and finance writer based in London. His work has been published in Nasdaq, Kiplinger, Financial Express and The Diplomat.