Why Block, Affirm, and Upstart Holdings Plunged Today – The Motley Fool | CarTailz

What happened

Stocks of former fintech high-flyers block (SQ -6.03%), Confirm (AFRM -4.07%)and upstart (UPST -3.38%) were down sharply today, down 6.9%, 5.7%, and 4.2% as of 3:00 p.m. EDT.

Underperforming or highly valued tech stocks saw widespread sell-offs today, particularly fintech stocks. This could mark a continuation of last week’s sell-off as a parade of Federal Reserve governors continued to feature in the media while maintaining their hawkish stance, even in the face of a better than expected Nov. 10 inflation report.

That could lead some to conclude that the Fed could be going too far and triggering a recession. With these stocks soaring recently, it’s perhaps not surprising that investors are taking some chips off the table.

Block could also be particularly vulnerable in the short term, having been a big proponent of cryptocurrencies in particular Bitcoin (BTC -2.89%). That could be a drag in the immediate aftermath of the FTX scandal as some fear contagion across the crypto landscape.

so what

Block could fall in sympathy with Bitcoin, which is also down around 5.1% over the past 24 hours. Notably, Block changed its name from Square because founder Jack Dorsey focused on cryptocurrency payments and lending, in addition to Block’s traditional fintech focus. As of September 30, Block had $156 million in Bitcoin on its balance sheet, even after impairments.

On Friday, analysts at Mizuho (KIND REGARDS -0.87%) released a note estimating that crypto trading volume for the year has fallen 30% to 40% below average, which could further hurt the company’s crypto trading revenue.

Block also bought into the Buy Now, Pay Later (BNPL) space following its $13.9 billion acquisition of Afterpay in February. That makes it a direct competitor to Affirm, just as investors have started to get too sour on BNPL platforms.

While it’s true that using BNPL offers some advantages over traditional credit cards, investors may be wondering if it’s such a great model for them. With inflation biting low-end consumers and a possible recession looming, there is great fear of taking out these unsecured short-term loans. At its most recent earnings release, Affirm was bullish and its depreciation metrics just returned to fiscal 2020 levels, which were lower than 2018 and 2019.

Management also emphasized that given the short-term nature of these loans, it could easily streamline its underwriting to adapt to a rapidly changing economy. Still, the skeptics seem to be winning today.

And of course, if the broader fintech ecosystem collapses, Upstart is likely to be sold out too. Upstart has no direct exposure to the crypto space, but the stock has been decimated due to the rapid rise in interest rates this year. Upstart makes multi-year personal loans and auto loans to people with questionable FICO scores, which is why investors are very skeptical of the name. Additionally, Upstart relies on third-party credit buyers who are fleeing the market amid rapidly rising interest rates.

With interest rates and the economy highly uncertain, especially after last week’s hawkish Fed comments, Upstart will not be able to grow. It may have to continue using its own balance sheet to make loans this year, increasing risks to its business model.

What now

While fintech stocks are among the hardest hit this year, they also have plenty of upside potential should the overall macro situation improve and sentiment turn around from the bottom.

However, it appears that the Federal Reserve is not yet ready to change or ease financial conditions, and it may take a recession before inflation eases for the Fed to ease its tough stance on interest rates.

Unfortunately, that may mean fintechs like Block, Affirm, and Upstart have to weather their first downturns as public companies before they can climb back up. Block’s crypto, consumer and small business exposures could be a drag in this scenario, as could Affirm’s BNPL clients. However, both are likely less risky than Upstart, which faces questions not just about its underwriting but its entire business model.

Investors looking for upside potential should tread cautiously on these stocks. If you do, you should take a closer look at these companies and assess whether you think their businesses could handle a drop in activity and higher writedowns in their credit segments. If so, they could be long-term winners from these depressed levels. If not, it’s best to stay away as they may not make it to the other side of an economic downturn.

Billy Duberstein has positions in Bitcoin. Its customers may own stocks of the named companies. The Motley Fool has positions in and recommends Affirm Holdings, Inc., Bitcoin, Block, Inc., and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

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