The COVID-19 pandemic accelerated consumer and digital adoption, boosting the fintech industry's growth. The accelerated technological transformation allowed fintech companies to deliver secure, seamless, and fully digital financial services to consumers at an attractive cost.
However, investors' concerns over rising inflation and the multiple interest rate hikes planned by the Fed this year have led to significant outflows from the overvalued fintech sector. Fintech stocks are high-growth stocks, and the expected interest rate hikes do not bode well for them because these companies often need to borrow capital to fund their growth. Furthermore, they face increasing competition from traditional banks as they themselves upgrade their digital services.
Given this backdrop, we think it could be wise to avoid fintech stocks Affirm Holdings, Inc. (AFRM) and Upstart Holdings, Inc. (UPST) even though their shares have declined more than 25% in price year-to-date. These stocks look overvalued at the current price levels.
Affirm Holdings, Inc. (AFRM)
AFRM in San Francisco provides digital and mobile commerce platforms by enabling a technology-driven payments network through partnerships with banks. A consumer can use the company's platform by selecting their repayment option while the loans are funded and issued by its bank partner. Its platform has three elements: a point-of-sale payment solution, merchant commerce solutions, and consumer-focused applications.
AFRM's adjusted operating loss for its fiscal second quarter, ended Dec. 31, 2021, was $7.90 million, compared to a $3.10 million adjusted operating income in the year-ago period. The company's net loss widened 500.2% year-over-year to $159.73 million. Also, its operating expenses increased 141.4% year-over-year to $557.21 million.
In terms of forward EV/S and P/S, AFRM's respective 10.81x and 9.67x are higher than the 3.75x and 3.71x industry averages. Its 52.05x forward Price/Cash Flow is 159.2% higher than the 20.08x industry average. Analysts expect AFRM's EPS to remain negative this year and next year. It failed to surpass the Street’s EPS estimates in each of the trailing four quarters. The stock has declined 55.4% year-to-date to close the last trading session at $44.80.
AFRM's weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, which equates to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
It has an F grade for Stability and Sentiment and a D grade for Value and Quality. It is ranked #79 out of 82 stocks in the D-rated Technology – Services industry. Click here to see the other ratings of AFRM for Growth and Momentum.
Upstart Holdings, Inc. (UPST)
UPST in San Mateo, Calif., is a leading artificial intelligence (AI) lending platform that helps access affordable credit while reducing its bank partners' risk and cost of lending. Its platform utilizes advanced machine learning tools to accurately gauge the risk and approve more applicants than traditional, credit-score-based lending models.
For its fiscal year ended Dec. 31, 2021, UPST's total liabilities increased 472.5% year-over-year to $1.01 billion. The company's operating expenses increased 219.2% year-over-year to $707.70 million. Also, its sales and marketing expenses increased 234.5% year-over-year to $333.45 million.
In terms of forward EV/S and EV/EBITDA, UPST's respective 7.26x and 33.41x are higher than the 2.94x and 10.53x industry averages. Its 10.56x forward P/B is 772.1% higher than the 1.21x industry average. The stock has declined 27.8% in price year-to-date to close the last trading session at $109.11.
UPST's POWR Ratings reflect these bleak prospects. It has an F grade for Stability and a D grade for Value and Momentum.
Within the D-rated Financial Services (Enterprise) industry, it is ranked #83 of 114 stocks. To see the other ratings of UPST for Growth, Sentiment, and Quality, click here.
AFRM shares were trading at $43.31 per share on Wednesday morning, down $1.49 (-3.33%). Year-to-date, AFRM has declined -56.93%, versus a -6.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
Down More Than 25% YTD, is Now a Good Time to Scoop Up Shares of Fintech Stocks Upstart and Affirm? StockNews.com
